The Federal Reserve held interest rates steady on Oct. 28, even as inflation continued to climb. But with policymakers divided and another rate hike looking increasingly likely in December, the pause may not last long.
Two officials wanted a hike
The Fed voted 10-2 to keep its benchmark interest rate at 3.75% to 4%, with Governor Lisa Cook and Cleveland Fed President Beth Hammack favoring a quarter-point increase.
Cook's dissent caught economists by surprise. Most had expected Hammack, Dallas Fed President Lorie Logan, and Minneapolis Fed President Neel Kashkari to push for higher rates. FWDBONDS economist Chris Rupkey suggested Cook's vote could have been a protest against the administration's efforts to remove her.
"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."
Karl Schamotta, Corpay
The Fed also changed its language on inflation, removing its earlier statement that September's rate hike would help bring inflation back toward its 2% target. Instead, officials said they need more information before deciding their next move.
At the same time, the committee upgraded its assessment of economic growth from a solid pace to a strong pace.
Inflation is picking up again
The Fed has another problem on its hands. Annual consumer inflation climbed to 3.7% in September, driven largely by higher gasoline prices. Core inflation, which excludes food and energy, reached 2.6%, coming in above expectations.
Wholesale inflation is rising even faster. The producer price index jumped 6.3% from a year earlier, its biggest increase since 2022. Economists also expect the Fed's preferred inflation measure, core personal consumption expenditures, to reach 3.1% when September figures are released.
Key Inflation Gauges Are All Running Above the Fed's 2% Target
Year-over-year change for September 2026, %, with core PCE as economists' estimate
Bar chart. September PPI: Inflation (%) 6.30%. September CPI: Inflation (%) 3.70%. Core PCE (Sept. est.): Inflation (%) 3.10%. September Core CPI: Inflation (%) 2.60%.
Markets were already betting on another increase before the Fed's announcement. CME FedWatch showed a 76.5% probability of a quarter-point hike at the Dec. 9 meeting.
Kay Haigh, chief investment officer of fixed income at Goldman Sachs Asset Management, also expects the Fed to resume raising rates in December.
Fewer meetings to decide rates
Fed Chair Kevin Warsh also announced a change to how the central bank will operate starting next year.
The Fed will continue holding eight meetings annually, but one meeting in 2027 will focus entirely on long-term strategy, without an interest rate decision or policy statement.
Warsh expects two such meetings in 2028, reducing the number of rate-setting meetings to six. He said the change would give policymakers more time to reconsider broader economic questions.
He also dismissed suggestions that politics or the upcoming Nov. 3 midterm elections influenced the decision.
On the economy, Warsh pointed to tighter credit conditions since September's rate hike, including rising borrowing costs for AI infrastructure projects and widening credit spreads.
Still, economic growth remains strong. First-half GDP growth was revised higher to 2.4% from 1.8%, with third-quarter growth expected to be even stronger. Meanwhile, the four-week average of unemployment claims remains near historically low levels.
Borrowing costs aren't coming down
The Fed's decision also has implications for households, particularly those looking to buy a home or take out a loan.
The 10-year Treasury yield, which helps determine mortgage rates, climbed five basis points to 5.047% following the announcement.
The average 30-year fixed mortgage rate now stands at 7.33%, compared with 7.12% a month earlier. Home equity loan rates have also risen to 8.77% from 8.28% in September.
Savers, meanwhile, are seeing slightly better returns. Five-year certificates of deposit now yield an average of 1.83%, while money market accounts offer around 0.45%.
Borrowing Costs Keep Climbing While Savings Yields Barely Move
Average US consumer rates, now vs September 2026, %
| Product | Now | September |
|---|---|---|
| 30-year fixed mortgage | 7.33% | 7.12% |
| Home equity loan | 8.77% | 8.28% |
| 5-year CD | 1.83% | 1.75% |
Charlie Wise, head of global research and consulting at TransUnion, said the Fed's pause should keep credit card borrowing costs relatively stable for now. But another rate hike could put further pressure on consumers carrying balances.
For now, savers stand to benefit from higher rates while borrowers face another stretch of expensive credit. And with Goldman Sachs expecting the Fed to raise rates at every other meeting, December could bring another increase.
