This week could help decide whether the Fed raises interest rates in December

The Marriner S. Eccles Federal Reserve Board Building, the main offices of the Board of Governors of the Federal Reserve System in Washington, D.C.AI Quick ReadA wave of technology earnings, fresh economic data, along with oil prices in the next few days could help decide whether Federal Reserve raises interest rates again this year.

The Federal Reserve is widely expected to leave rates unchanged at its policy meeting this week, so the focus has shifted to its Dec. 8-9 meeting. There is already plenty of data to justify another increase. Inflation remains stubbornly above the Fed’s 2% target, and the oil shock that began months ago is spreading beyond gas prices and into the economy at large.

Economic growth, meanwhile, has been resilient. Still, economic strength is uneven. Hiring has slowed, lower-income households are struggling with higher prices, and the stock market is showing signs of strain. That makes this week’s slew of tech earnings from Microsoft, Alphabet and Amazon consequential.

The AI investment boom has helped sustain economic growth even as higher interest rates and energy costs have weighed on other parts of the economy. But investors are becoming less willing to finance that expansion without evidence of its returns.

The Nasdaq has fallen about 5% from its recent record high in early October, and semiconductor stocks have declined 12% in the past month, according to the Philadelphia Semiconductor Index. Shares of Meta fell sharply on Monday after the company said it would offer $95 billion in stock to fund aggressive AI investment, raising questions about when that spending will translate into profit.

The concern extends beyond stocks. AI infrastructure relies on borrowing that becomes more expensive as interest rates rise. A disappointing round of earnings could deepen the selloff, raising borrowing costs and making businesses and households less willing to spend.

Strong results, on the other hand, could reassure investors that the AI boom is far from fizzling out. Fed officials will certainly be watching as they turn to their December rate decision and economic projections. Another sustained selloff could make a December rate increase unnecessary.

Citigroup economists expect a quarter-point increase but warned in a note on Monday that further stock declines could bring the tightening cycle to an end. At the same time, higher energy prices could keep inflation elevated even as they weaken economic activity.

Federal Reserve Chair Kevin Warsh will also need to decide on how he communicates forward guidance at the October and December meetings. Since becoming chair this spring, he has said he would like to end the forward guidance that investors have long relied upon to anticipate Fed decisions.

He has repeatedly declined to provide his own interest-rate projections and has said that policymakers should approach each meeting without premade decisions. Other Fed officials haven’t been as restrained. Recent comments from New York Fed President John Williams and Vice Chair Philip Jefferson helped persuade markets that an October increase was off the table.

That leaves investors to determine which signals by which Fed officials matter and how to weigh market volatility. This Wednesday’s press conference offers Warsh an opportunity to clarify how he is weighing risks, even if he declines to offer any indication of what the Fed will do in December.

By the end of the week, investors should have a better sense of whether consumers can continue supporting economic growth, whether the AI investment boom can withstand higher financing costs and whether financial markets have tightened enough to give the Fed reason to wait.

Warsh has made clear that he doesn’t want to tell markets what the Fed will do next. This week, markets may instead tell him what the Fed should do.