Europe Stocks Rebound as Fed Rate Decision Looms

European stocks staged a modest recovery on Wednesday, rising to their highest levels in three months as investors awaited the Federal Reserve's interest rate decision. The Stoxx Europe 600 index gained 0.5%, with major indexes in Germany, France, the UK, Spain, and Italy posting modest advances.

The market is pricing in a nearly 92% probability of a quarter-point hike, which would be the Fed's first increase since mid-2023. Morgan Stanley now projects two consecutive hikes this year, one this week and another in December, citing stronger-than-expected inflation data and robust demand tied to the AI investment boom.

However, economists including Mark Zandi of Moody's Analytics and Steve Englander of Standard Chartered warn that hiking rates now risks a serious policy error. They caution that cooling the economy without triggering layoffs or pushing up unemployment is akin to walking a tightrope.