NEW YORK, Oct 28 (Reuters) – The Federal Reserve held interest rates steady on Wednesday, awaiting further data on the path of inflation, and said it would reduce its policy-meeting schedule starting next year.
In a 10-2 decision, the US central bank said it would maintain its benchmark interest rate within the current 3.75%-4% range while acknowledging that inflation “remains elevated,” upgrading its assessment of the economy and hinting that further rate hikes may be coming depending on inflation.
“The accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee’s 2% goal,” the rate-setting Federal Open Market Committee said in its latest policy statement. “The Committee will deliver price stability.”
Fed Governor Lisa Cook, currently targeted by President Donald Trump for removal from the central bank, dissented in favor of a quarter-percentage-point rate hike, as did Cleveland Fed President Beth Hammack, a consistently hawkish voice who also dissented in July for the same reason.
The Fed’s latest policy statement is a notable change from the September 15-16 meeting, with a hint of the sort of forward guidance Fed Chairman Kevin Warsh has said he wants to avoid.
The Fed’s assessment of the economy was upgraded to “strong” from the “solid” expansion seen as of the September meeting, while investment was still viewed as robust and job gains were keeping pace with the workforce.
REACTION:
STOCKS: US stock indexes rose after Warsh began speaking, with the Nasdaq composite and the S&P 500 up 0.2%.
BONDS: Treasury yields pulled back then steepened after Warsh started his press conference, with the 2-year yield that’s most sensitive to Fed policy down 3.8 basis points to 4.7%, the 10-year yield up 5 basis points to 5.042% and the 30-year yield up 6 basis points at 5.367%.
FOREX: The US dollar index was off 0.2%.
COMMENTS:
TOM GRAFF, CHIEF INVESTMENT OFFICER, FACET, PHOENIX, MARYLAND:
“As expected, the Fed held rates at this meeting, setting up what is likely to be a hike in December. I believe this was a mistake: the Fed should have hiked today. Because Warsh decided to eschew forward guidance, his actions have to do all the talking. Another Fed Chair could have passed on a hike this meeting and still shown resolve to fight inflation by promising hikes down the road. Warsh has ceded that option.
“That means he needs to act sooner rather than later. Inflation remains high, without any obvious sign it’s subsiding, and I don’t think the recent spike in diesel prices has fully flowed into consumer inflation yet. If inflation is too high, what is the benefit of waiting? There isn’t any material difference between hiking now and hiking in December, especially since a December hike is fully priced in. Hiking today would have bolstered Warsh’s credibility as an inflation fighter. By waiting, he risks coming off as hesitant, or worse, complacent.”
RONALD GESTIEHR, DIRECTOR OF WEALTH MANAGEMENT, LUTTNER FINANCIAL, PITTSBURGH, PENNSYLVANIA:
“I believe they made the the right decision today. The economy remains resilient, inflation is a large concern, especially with everything going on with energy prices and the Middle East. They are walking a fine line on continuing to raise rates, they don’t want to go too far, too fast, and then cause us to slip into a recession.
“Raising rates does add pressure on individual consumers already hurt by inflation, especially considering lending rates.”
KAREN MANNA, FIXED INCOME INVESTMENT STRATEGIST, FEDERATED HERMES, PITTSBURGH:
“By holding rates steady, the Fed has effectively deferred the debate rather than settled it. The market’s attention now shifts to December, incoming economic data, and any signals that clarify the Fed’s reaction function. Beyond the near-term outlook, investors will increasingly focus on the work of the Task Forces and the composition of the 2027 FOMC, both of which could shape the trajectory of policy over the coming years.”
CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, NORTHLIGHT ASSET MANAGEMENT, CHARLOTTE, NORTH CAROLINA:
“Although the Fed held off on raising rates today, as we expected, they left plenty of clues that they were planning to raise rates in December. As always, a lot can change in the data between now and then, but if it weren’t so close to the midterm elections, they probably would have raised rates today, and now it’s unlikely that anything will stop them from raising rates at the next meeting.
“Next year, the picture is less clear. The futures are predicting two more rate hikes, and that makes sense if everything stays the same, but as we have learned over the past couple of years, things rarely do (e.g. tariffs, Iran war, etc). It’s our expectation that the economy will eventually run into some issues as rates move higher and the AI buildout is impacted.
“If we have a growth slowdown or recession in the next 12 months, then of course the Fed will react and we will see lower interest rates by the end of next year, but if the economy continues to be resilient despite all of the macroeconomic headwinds, then the Fed may end up raising even more than the 2 times that are currently priced in.”
SHAWN SNYDER, ECONOMIC STRATEGIST, POTOMAC FUND MANAGEMENT, BETHESDA, MARYLAND:
“The Fed appeared to upgrade its assessment of the economic outlook, describing economic activity as expanding at a “strong” rather than a “solid” pace. Of course, that raises the obvious question: If the economy is so strong and inflation remains stubborn, why not hike now?
“It seems highly unlikely that the inflation outlook will improve materially between now and December. Perhaps the Chair simply wants to give the task forces more time to reach their conclusions before taking the next step.
“For investors concerned about financing pressures in AI infrastructure, today’s decision to hold rates is unlikely to provide much relief. Thus far, credit-market distress has been concentrated among the weakest borrowers, but the enormous capital requirements of the AI buildout increasingly appear headed for a collision with elevated borrowing costs. That could leave some of the smaller fish in the AI pond going belly-up, while the bigger, better-capitalized fish keep swimming along just fine.
“We continue to believe hard assets are attractive in the current environment. When elevated inflation causes stocks and bonds to become more correlated, hard assets can provide an important source of portfolio diversification.”
DAVID KRAKAUER, VICE PRESIDENT OF PORTFOLIO MANAGEMENT, MERCER ADVISORS, SAN DIEGO, CALIFORNIA:
“A hold on rates, but not a dovish one. The vote was 10-2, with Governor Lisa Cook and Cleveland Fed President Beth Hammack dissenting in favor of a hike. Cook’s dissent is the surprise, since many expected Hammack and Logan to be the hawks. The wording was also constructive on the economy. The statement described activity as expanding at a strong pace and spending as resilient, and it called productivity growth strong and capital investment robust. That doesn’t sound like a Fed worried about growth. It sounds like a Fed that believes the economy can handle tighter policy, which is why the debate is about when to hike, not whether.
“Stay in your seat. The hold doesn’t change the fundamentals: earnings growth for equities still looks attractive, and fixed income portfolios are now paying material real yields. Both point toward staying invested. With less forward guidance from Warsh, the path may be bumpy, but investors are being paid to be patient.”
BILL MANN, CHIEF INVESTMENT STRATEGIST, MOTLEY FOOL ASSET MANAGEMENT, VIENNA, VIRGINIA:
“We were pretty sure we were going to see a fight inside the house. The really interesting part was that they felt like they needed ‘more information,’ which suggests to me that there is wild disagreement over how much petroleum prices are impacting inflation. You can’t fix a geopolitical imbalance with a monetary action.
“The 2% inflation goal seems a little performative. I don’t think that goal is what is most important for the Fed right now.”
BRIAN JACOBSEN, CHIEF ECONOMIC STRATEGIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN:
“It was a little surprising to see a governor dissent, but it was more surprising to see the statement upgrade the economic growth description from ‘solid’ to ‘strong.’
“In the Fed’s hierarchy, from weakest to strongest, it goes contraction to modest to moderate to solid to strong.
“What are they looking at to give the economy an upgrade? The moving average of weekly payroll gains from ADP was trending up between the July and September meeting, but it has been trending down since. The Atlanta Fed’s GDPNow forecast has gone from white hot to merely smoldering.
“Maybe that’s why what could have been construed as forward guidance in the statement is now decidedly vague. More information will help them determine the policy stance, but last time, by saying the Fed ‘removed a dose of accommodation’ implied that the Fed funds rate was still too low. Now it’s up in the air.”
JAMIE COX, MANAGING PARTNER, HARRIS FINANCIAL GROUP, RICHMOND, VIRGINIA:
“The Federal Reserve just told markets that its rate hike expectations might be overzealous for what it’s likely to deliver. Data dependency is Fedspeak for “we don’t want to do anything unless we are forced to.”
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST, CORPAY, TORONTO:
“Two dissents rather than the three or four many had expected is a dovish surprise at the margin, but an apparent upgrade in the Fed’s assessment of the economy itself should leave markets in no doubt that more tightening is coming.”
KAY HAIGH, GLOBAL HEAD, CHIEF INVESTMENT OFFICER OF FIXED INCOME AND LIQUIDITY SOLUTIONS, GOLDMAN SACHS ASSET MANAGEMENT, NEW YORK:
“We expect the Fed to resume rate hikes in December. September’s strong CPI print is a reminder that upside inflation risks remain, and the Fed is likely to look to take out further insurance. While the September dot-plot suggests just one more hike, another increase in energy prices or further strong data prints could bring additional tightening into play next year.”
CHARLIE WISE, HEAD OF GLOBAL RESEARCH AND CONSULTING, TRANSUNION, CHICAGO:
“Today’s Federal Reserve decision to leave interest rates unchanged reflects the continued balancing act between inflation concerns and an economy and employment situation that have remained relatively resilient. Despite recent inflation readings coming in higher than expected, and well above the Fed’s target levels, policymakers opted to hold rates steady as they assess the impact of the September rate increase and monitor stable labor market conditions.
“For consumers, a pause in rate hikes means credit card borrowing costs are not increasing for now, but interest rate risk has not disappeared. With future policy decisions still dependent on economic conditions, and early signals that a December rate hike may well be on the way, consumers should continue to approach credit card debt carefully. As holiday spending ramps up, it’s important to stay within a budget and avoid charging more than you can repay over one to two months. Carrying larger balances can become costly, particularly if inflation remains persistent and interest rates stay elevated for longer.”
CHRISTOPHER HODGE, CHIEF US ECONOMIST, NATIXIS, NEW YORK:
“The Fed kept rates on hold as broadly expected in October, following a hike in September, even after inflation data was higher than expected in the intermeeting period. The pause follows through on the implicit suggestion from NY Fed President Williams and Vice Chair Jefferson that consecutive hikes are not urgent at this time.
“Still, inflation remains a problem, growth remains solid, and the unemployment rate is stable – and a hike in December is now likely a foregone conclusion. If December is close to certain, the question must be asked, why delay the inevitable? In September, Warsh said that the Fed hike removed a “dose of accommodation” and perhaps the committee feels that in the intermeeting period, asset volatility and some wobbly tech names removed another. The statement suggests the Fed wants to get more data before moving again.
“The primary question will likely be the rationale for the pause after worse than expected inflation data in the inter-meeting period. Warsh will likely deflect and reiterate the line that this Fed looks at trends and is not beholden to specific point data. This will be unilluminating and unsatisfactory, but the overwhelming most likely answer. Anything that deviates from this answer will be insightful.”
(Reporting by Suzanne McGee, Saeed Azhar, Saqib Ahmed, Niket Nishant, Sinead Carew, Laura Matthews, Tatiana Bautzer; editing by Colin Barr)
