The Federal Reserve is once again facing a test not only from inflation and the bond market, but also from U.S. politics.
Ahead of the U.S. midterm elections, investors’ attention has begun to focus on whether political agendas could influence monetary policy. However, Federal Reserve Bank of Kansas City President Jeffrey Schmid delivered a firm message: elections should not affect the Federal Reserve’s policy decisions at its October meeting.
That statement is becoming increasingly important because the Fed is currently in a situation that is far more complex than it was a few months ago.
Inflation is still above the 2% target. A number of Fed officials have started to open the possibility of rate hikes, while stock and bond markets are extremely sensitive to any change in policy expectations.
🏦 Schmid: Monetary Policy Must Be Based on the Economy
Schmid had already taken a relatively hawkish stance earlier.
In an interview with Bloomberg Television at Jackson Hole on August 27, Schmid said that current monetary policy may be accommodative rather than restrictive. He argued that the current interest-rate level of 3.50%–3.75% does not constrain the U.S. economy—"even short-term rates may have a loose character," he said. Schmid emphasized that inflation is still "stubborn" and "sticky," and that "we have to keep finding ways to break through it."
Schmid also explicitly rejected the idea that the October 28 meeting can’t be scheduled due to the election, emphasizing that the political calendar should not be considered in monetary policy decision-making.
So Schmid’s message about the election is actually part of a bigger issue: the Fed wants the market to believe that rate decisions are driven by economic data, not the political calendar.
📊 Why is October Important?
The Federal Reserve’s official calendar shows that the next FOMC meeting is on September 15–16, then October 27–28, followed by December 8–9.
That means the October meeting will take place just a few days before the midterm election in the U.S. in November.
This timing makes Fed independence even more sensitive.
· If the Fed raises rates ahead of the election, the decision could be perceived as political.
· If the Fed holds or cuts rates, the reverse question could also arise.
Therefore, Schmid is basically reaffirming a principle: the Fed shouldn’t adjust policy just because the election is near.
🔥 The problem: Inflation hasn’t given any comfortable room yet
That’s why Schmid’s comments have become important.
The latest data released on August 26, 2026 by the Bureau of Economic Analysis shows that the PCE price index— the Fed’s favorite inflation indicator— for July 2026 was:
Value Indicator
PCE (Year-over-Year) 3.7%
Core PCE (Year-over-Year) 3.3%
PCE (Month-over-Month) 0.2%
Core PCE (Month-over-Month) 0.2%
These figures show that inflation is still far above the Fed’s 2% target. The headline PCE data of 3.7% is unchanged from June, while core PCE at 3.3% still indicates persistent price pressure.
Besides inflation, the labor market is also showing signs of weakening. Data for August 7, 2026 showed the U.S. economy lost 23,000 jobs in July, far below the consensus expectation for an addition of 80,000 jobs. The unemployment rate was 4.1%. Meanwhile on August 28, the annual benchmark revisions for nonfarm payrolls showed a decrease of 79,000.
With conditions like this, the Fed has a reason to remain cautious about easing.
Even some officials started speaking more forcefully:
· Cleveland Fed President Beth Hammack said it’s time to act, because inflation has been above target for more than five years. She warned that "the longer inflation stays above target, the harder it gets to bring it back down".
· Chicago Fed President Austan Goolsbee also said that the biggest concern right now is inflation that hasn’t been brought under control, with factors like the war in the Middle East pushing up energy costs and fluctuating tariff policies.
· Boston Fed President Susan Collins issued a firm conditional statement: if data shows inflation isn’t falling as expected, she will support rate hikes in "one or two meetings ahead".
So even if the market might be hoping for rate cuts, some Fed officials are instead thinking about the possibility of rate hikes.
⚠️ The Fed is already split
At the July 28–29, 2026 FOMC meeting, the Fed kept the policy rate at 3.50%–3.75%.
But the decision only received support 9–3. Three members, including Hammack, voted for a 25 basis-point hike.
This isn’t a small detail. It means the internal debate about the direction of interest rates is already strong enough. Even before October, the market must face two possibilities:
· 🕊️ Dovish: Inflation falls → economy weakens → the Fed considers cuts.
· 🦅 Hawkish: Inflation persists → demand stays strong → the Fed keeps rates unchanged or raises them.
And Schmid is clearly closer to the second camp.
🇺🇸 Election vs. Inflation: Which Matters More?
The answer from the perspective of monetary policy should be simple: inflation and economic conditions.
The Fed has a mandate to maintain price stability and support healthy labor market conditions.
If inflation is still too high by October, the Fed, in theory, would have to make decisions based on that data even if the election is only a few weeks away. Conversely, if inflation falls convincingly and the labor market weakens, the Fed should also have the freedom to ease even if that decision happens to coincide with the election.
The election date shouldn’t be a variable in the monetary policy equation.
💵 The Market Has Started Pricing in Rate-Hike Risk
Interestingly, the market itself is starting to change its expectations significantly.
After Fed Chair Kevin Warsh’s speech at Jackson Hole on August 28, 2026, market expectations for rate hikes jumped dramatically:
Probability Instruments Before Probability After
September increase ~35% ~57-60%
December increase ~74% (previously) >70%
In his speech, Warsh mentioned "inflation" 25 times, saying inflation is still "too high" and that if it doesn’t fall at a "fast enough pace," then there is "still work that needs to be done." He also emphasized the Fed’s commitment to the 2% inflation target.
An analyst at Capital Economics said they are "now more confident the Fed will raise rates before the end of the year, likely by 25 bp in December."
Those figures show something very important: the market no longer views a rate hike as an extreme scenario. And if expectations for hikes become even stronger, pressure on risk assets could increase.
📉 What’s the Impact on U.S. Stocks?
If Schmid and other hawkish officials can shift market expectations toward "higher for longer," then growth and technology stocks become the sectors that need the most attention.
The reason is simple: the valuation of technology stocks is highly sensitive to the discount rate. When yields rise, future cash flows are discounted at a higher rate → valuation multiples get pressured.
The market reaction on August 28, 2026 was quite clear:
Change Index
Nasdaq Composite -0.52% (down 138.93 points to 26,402.42)
S&P 500 -0.25% (down 19.23 points to 7,711.76)
Dow Jones -0.02%
Still, on a weekly basis, Wall Street recorded gains: Dow and S&P 500 rose 0.5%, while Nasdaq rose 0.9%.
So:
· Hawkish Fed → Treasury yields rise → cost of capital increases → growth valuations get pressured → Nasdaq risks weakening.
· Fed dovish → yields fall → financial conditions loosen → growth stocks get breathing room → Nasdaq could continue its rally.
🪙 What about Bitcoin and Crypto?
Bitcoin is also not immune to changes in Fed policy.
After Warsh’s speech at Jackson Hole, Bitcoin fell below $80,000. BTC/USD briefly touched $78,442 on Bitstamp, with a daily drop of about 1%. More than $488 million in long positions were liquidated. Bitcoin eventually stabilized around $79,000, after previously briefly touching $81,330 earlier that same day.
Interestingly, this drop happened even though U.S. spot Bitcoin ETFs recorded inflows for nine straight days, with inflows on August 28 reaching $242 million.
So the relationship between the Fed and crypto isn’t always linear:
· A hawkish Fed is typically negative for crypto liquidity.
· However, concerns about fiscal policy and the dollar could create a different bullish narrative.
🥇 Gold Is Also at a Crossroads
Gold’s price movement provides an interesting example of this dynamic.
On August 27, spot gold briefly recovered to around $4,625.83 per ounce. However after Warsh's hawkish speech on August 28, spot gold closed down 3.2% to $4,454.23 per ounce. COMEX gold ended around $4,660.70.
In theory, high interest rates raise the opportunity cost of holding gold because gold doesn’t generate yield.
But gold still gets support from:
· policy uncertainty;
· geopolitical risk (especially the war in Iran);
· concerns about U.S. government debt, which has already surpassed $40 trillion;
· and dollar uncertainty.
That means the gold market isn’t reading just: "Is the Fed going up or down?" But also: "Why does the Fed need to keep interest rates high?"
🧠 Fed Independence Becomes an Asset
There’s a reason why Schmid’s comments carry more weight than just views on interest rates.
If investors believe the Fed can make decisions without political pressure, then inflation expectations will be better preserved.
But if the market starts to believe monetary policy is influenced by elections, fiscal pressures, or short-term political interests, the consequences could be much bigger:
· Bond yields can rise.
· Risk premium could rise.
· The dollar could face pressure.
· and the cost of funding for the U.S. government could become even more expensive.
At the moment, the 10-year Treasury yield is around 4.67%, while the 30-year yield is near the 5.2% level, the highest since 2007.
Therefore, Fed independence isn’t just a political issue. It’s part of financial market stability.
🔍 Markets Need to Pay Attention Not Only to Schmid
Schmid is indeed hawkish, but one official doesn’t determine FOMC policy on their own.
Investors need to look at how the whole committee is thinking, especially:
· Fed Chair Kevin Warsh’s Jackson Hole speech on August 28, 2026 is the main focus of the market;
· a member of the Board of Governors;
· the regional Fed president who has a voting right;
· inflation data (PCE, CPI);
· labor data (payrolls, unemployment rate);
· economic growth (Q2 2026 GDP was recorded at 1.5%);
· and bond market conditions.
Interestingly, on August 28, market attention was actually focused on Warsh’s first speech at Jackson Hole. Warsh delivered a hawkish signal stronger than many expected, and the market reacted quickly.
In other words:
· Schmid gave a hawkish signal.
· Warsh reinforced the signal with a clear and forceful speech.
🎯 Three Scenarios Leading to October
🟢 Bullish Scenario for Stocks
· Inflation begins to fall consistently (core PCE below 3%).
· The labor market weakens further.
· Warsh avoided signaling any further hikes.
· Rate-cut expectations increase.
· Yields fall → Nasdaq and growth stocks could strengthen.
🟡 Sideways Scenario
· Inflation remains high but not getting worse (core PCE holds at 3.3%).
· The Fed keeps interest rates unchanged.
· Fed officials sent mixed signals.
· The market waits for the next data releases.
· Volatility increases, but there’s no clear direction yet.
🔴 Bearish Scenario
· PCE and core inflation rise again.
· Labor remains strong.
· Inflation expectations rise.
· More Fed officials support a hike.
· Yields jump → pressure on technology stocks, crypto, and risk assets.
In this scenario, the election doesn’t become a reason for the Fed to hold back. Instead, Schmid’s remarks show that the political calendar is not a policy consideration.
📌 Conclusion: October Will Test the Fed’s Independence
Jeffrey Schmid’s statement has a bigger message than just: "The election won’t affect interest rates."
The message is: the Federal Reserve wants the market to believe monetary policy is determined by inflation, labor, growth, and financial conditions—not short-term political interests.
And the situation heading into October is becoming even more interesting:
Factors of the Current Situation (August 29, 2026)
Fed policy rate 3.50% – 3.75%
PCE Inflation (YoY) 3.7%
Core PCE (YoY) 3.3%
Q2 2026 GDP 1.5%
Unemployment Rate 4.1%
10-Year Treasury Yield ~4.67%
Probability of a September hike ~57-60%
December hike probability 70%
July FOMC position, 9-3 (3 support hikes)
Meanwhile, the October meeting is scheduled for October 27–28, 2026, just a few days before the U.S. midterm election.
So the real fight isn’t: the Fed vs. the election.
The real fight is: inflation vs. interest rates vs. growth.
· If inflation wins, interest rates could stay high— even rise.
· If growth weakens, there will be room for easing.
· If both happen at the same time—high inflation while the economy weakens— the Fed will face one of the hardest policy dilemmas.
And for investors, the most important signal to monitor isn’t the election date.
Watch PCE, payrolls, Treasury yields, Fed expectations, and the Warsh–Schmid comments.
Because when October arrives, the Federal Reserve’s decision will likely be determined by one thing:
It’s not about who’s campaigning, but what the U.S. economy is doing.
