Fed holds rates at 3.75 to 4.00% as bond yields retreat; December hike remains likely
Two officials voted to raise rates on Wednesday. Ten year yields closed Tuesday 32 basis points below their 5 October peak, yet 16 of 18 officials pencilled in another hike for this year.
The Fed paused on Wednesday. A December hike is now the base case, and the bond market has stopped resisting it. The Federal Reserve held its policy rate at 3.75 to 4.00% on Wednesday 28 October by a vote of 10 to 2.
Lisa Cook and Beth Hammack voted against, preferring a quarter point increase. It was Cook's first dissent since she joined the board in 2022. Fortune reported it was the first time since 1992 that a governor and a regional president dissented together.
Chairman Warsh listed what he had seen since the September hike in his opening statement. Financial and credit conditions had "tightened for some businesses and households, much as we would expect." Market participants were "becoming somewhat more discerning in their capital allocations." Overall conditions were tighter, he said, but "I'm unwilling and unable to call them tight."
The ten year Treasury yield has made a round trip. It was 5.01% on 16 September, 5.31% on 5 October and 4.99% on 27 October. That leaves 8 to 9 December as the meeting where the Fed's September plan meets that market. CME Group's FedWatch tool put the odds of a December hike at 78% before the decision and 87% after it, Investopedia reported at 3:40 pm EDT.
What officials planned in September
The plan was set in September. On 16 September the committee voted 12 to 0 for a quarter point hike. Its projections showed 16 of 18 officials, or 89%, expecting at least one more hike by the end of 2026. Twelve put the end 2026 midpoint at 4.125% and 4 at 4.375%. Only 2 sat at today's 3.875%.
The minutes, released on 7 October, said most participants judged another increase would likely be appropriate by year end. Many saw conditions as supportive of growth, with equity prices up substantially this year and corporate bond spreads narrow. Several called the policy rate not restrictive or only mildly restrictive.
Warsh would not call conditions tight. The Treasury curve agrees. The ten year Treasury yield peaked at 5.31% on 5 October, according to Treasury daily data, and closed at 4.99% on 27 October.
That is 32 basis points lower. It is also 2 basis points below the 5.01% recorded on the day of the September hike. The ten year is back where it stood when the Fed raised rates. On Wednesday afternoon it traded above 5.04%, Investopedia reported, and traders added to their December hike bets.
The two year yield closed at 4.70%, about 80 basis points above the 3.875% midpoint of the policy range. The front end of the curve still sits well above the policy rate.
The 10 year Treasury yield rose from 5.00 percent on 15 September to a peak of 5.31 percent on 5 October and was 4.99 percent on 27 October, while the 2 year yield was 4.70 percent, about 80 basis points above the 3.875 percent midpoint of the Fed's target range.
View data
| Date | 10 year yield | 2 year yield |
|---|---|---|
| 2026-09-15 | 5 | 4.67 |
| 2026-09-16 | 5.01 | 4.74 |
| 2026-09-17 | 4.94 | 4.67 |
| 2026-09-18 | 5.01 | 4.76 |
| 2026-09-21 | 4.96 | 4.76 |
| 2026-09-22 | 4.96 | 4.71 |
| 2026-09-23 | 5.11 | 4.85 |
| 2026-09-24 | 5.18 | 4.87 |
| 2026-09-25 | 5.17 | 4.81 |
| 2026-09-28 | 5.24 | 4.92 |
| 2026-09-29 | 5.26 | 4.89 |
| 2026-09-30 | 5.29 | 4.88 |
| 2026-10-01 | 5.24 | 4.78 |
| 2026-10-02 | 5.28 | 4.83 |
| 2026-10-05 | 5.31 | 4.84 |
| 2026-10-06 | 5.27 | 4.79 |
| 2026-10-07 | 5.28 | 4.77 |
| 2026-10-08 | 5.22 | 4.75 |
| 2026-10-09 | 5.24 | 4.8 |
| 2026-10-13 | 5.21 | 4.79 |
| 2026-10-14 | 5.19 | 4.82 |
| 2026-10-15 | 5.1 | 4.77 |
| 2026-10-16 | 5.09 | 4.74 |
| 2026-10-19 | 5.15 | 4.77 |
| 2026-10-20 | 5.12 | 4.79 |
| 2026-10-21 | 5.13 | 4.81 |
| 2026-10-22 | 4.96 | 4.65 |
| 2026-10-23 | 5 | 4.69 |
| 2026-10-26 | 5 | 4.68 |
| 2026-10-27 | 4.99 | 4.7 |
Stocks and credit tell different stories
Equities have not given way either. The S&P 500 closed Tuesday at 7,723, 2.3% above its 16 September close of 7,552. The minutes used equity prices as their yardstick for supportive conditions. Bank of America's weekly flow note shows retail clients selling single stocks after Meta Platforms fell 7.0% on 22 October. Institutions and ETF buyers took the other side.
The best case for the hold is credit. The minutes said spreads on bonds issued by AI hyperscalers widened notably from low levels early this year and narrowed slightly since. The Desk manager reported market commentary that heavy private debt issuance for AI was lifting term premiums.
The minutes also said credit appeared "somewhat tight for private credit loans and small businesses." That is a narrow tightening. If credit is the channel, the December test is the spread on hyperscaler issuance, not the Treasury curve.
Warsh's stated reason for waiting is inflation. He said inflation has run "above the Committee's objective for close to 6 years" and that energy and related prices "have moved higher again in recent weeks." He also said third quarter growth is likely running above 3 percent. "The information we receive over the coming period will help us determine where we want policy to be," he said. September consumer prices rose 3.7% from a year earlier.
The data before December
Six reports arrive before the meeting. Third quarter GDP is due on Thursday 29 October. September personal income and outlays, which include the PCE inflation gauge, arrive the same day. October jobs follow on 6 November and October CPI on 10 November. October personal income and outlays arrive on 25 November and November jobs on 4 December.
November CPI follows on 10 December, the day after the meeting ends. The committee will therefore decide without the freshest inflation print.
The Fed also upgraded its view of growth. Its statement says activity "is expanding at a strong pace", up from "solid" in September, according to Fortune. Strong growth with elevated inflation is the setting in which the dissenters wanted to act.
The implementation note keeps the interest rate on reserve balances at 3.90% and the overnight reverse repo rate at 3.75%. It takes effect on 29 October. The Desk will buy Treasury bills when appropriate to maintain an ample level of reserves.
Warsh also announced a change to the calendar. In 2027 one meeting will cover strategy only, with no vote on the funds rate and no policy statement. In 2028 he expects two such meetings and six for setting policy.
The Fed keeps eight meetings a year, so 2027 will have seven rate decisions. That leaves fewer scheduled chances to correct a miss.
What borrowers face
Floating rate borrowers face a clear price for fixing before 9 December. The two year yield of 4.70% is already 80 basis points above the policy midpoint, so it covers the December hike the dots call for. Fixing now costs little more if the hike comes, and waiting wins only if October CPI and the jobs reports soften.
UBS now expects two further hikes by mid-2027, Investing.com reported on 28 October. Waiting for a lower fixing rate bets against both the Fed's dots and a large dealer's forecast.
The 8 to 9 December meeting is the last chance to deliver the hike that 16 of 18 officials pencilled in for 2026. If the ten year yield is still near 5.0% when October CPI prints on 10 November, the committee will have no market tightening left to point to. A quarter point rise to 4.00 to 4.25% on 9 December is then the likely outcome.