US stocks and oil prices rise ahead of Fed meeting to decide on interest rate cut

US stocks hit new records before closing little changed on Tuesday as investors awaited the outcome of a Federal Reserve meeting. Crude oil prices rose on expectations of an imminent interest rate cut.

The S&P 500 closed up 0.03% at 5,634.58. During the session, the broadest gauge of U.S. stocks hit an all-time high of 5,670.81.

The Dow Jones Industrial Average fell 15.9 points, or 0.04%, to 41,606.18, after setting a new intraday record.

The Nasdaq index rose 0.2% to end the session at 17,628.06 points.

The new records for the S&P 500 and Dow Jones come at a time of unfavorable seasonality. Over the past 10 years, September has been the worst month of the year for the S&P 500, with an average decline of 1.3%, according to FactSet data.

Wall Street stock traders have also been battling late-summer headwinds stemming from concerns about the health of the U.S. economy. Disappointing August jobs and manufacturing data triggered a sell-off, but the market has shown remarkable resilience after more recent data showed a slowdown in inflation, bolstering the case for the Fed to start cutting interest rates.

The Fed's most anticipated monetary policy meeting of the year kicked off on Tuesday and will conclude on Wednesday. The central bank's interest rate decision is due Wednesday afternoon local time, followed by a press conference by Fed Chairman Jerome Powell.

The Fed's campaign to raise interest rates to fight inflation began in March 2022. Since July 2023, the federal funds rate has been held at a 23-year high of 5.25-5.5%.

Consumer spending remained robust, according to a report from the Commerce Department on Tuesday. Retail sales rose 0.1% in August from the previous month, compared with a 0.2% decline forecast by analysts in a Dow Jones survey. Excluding autos, retail sales rose 0.1% in August, slightly below the 0.2% gain expected.

After the data was released, investors slightly reduced their bets on the possibility of the Fed cutting interest rates by 0.5 percentage points at this meeting.

According to data from the CME Group's FedWatch Tool, the market is pricing in a 63% chance of the Fed opting for a 0.5 percentage point cut, down from 67% on Tuesday, though still well above the 47% chance on Friday.

The retail sales data prompted the Atlanta Fed to raise its forecast for third-quarter US gross domestic product (GDP) growth to 3% year-on-year, from a forecast of 2.5% growth before the report was released. The world's largest economy grew 3% in the third quarter.

“There doesn’t seem to be any reason for the Fed to cut rates by half a percentage point right away. While the job market is weakening, that weakness hasn’t trickled down to consumer demand in the economy. If this is an economy that’s on the verge of recession, consumers certainly haven’t noticed it yet,” Christopher Rupkey, chief economist at Fwdbonds, told Reuters.

In addition, some investors and experts also believe that a large interest rate cut could fuel unnecessary concerns about the health of the economy.

“A half-point rate cut would imply increased concern from the Fed about the labor market outlook. That would be seen as a sign of concern. I think there will be a big gap between what the market is expecting and what the Fed is expected to convey,” Adam Turnquist, chief market strategist at LPL Financial, told CNBC.

In the energy market, Brent crude oil futures in London increased by 0.95 USD/barrel, equivalent to an increase of 1.3%, closing at 73.7 USD/barrel. WTI crude oil futures in New York increased by 1.1 USD/barrel, equivalent to an increase of 1.6%, closing at 71.41 USD/barrel.

Oil prices rose as crude production in the US Gulf of Mexico has yet to fully recover from Hurricane Francine last week.