The US central bank chooses to wait, but the split vote and comments from Chair Kevin Warsh confirm that the fight against inflation is not over. Wall Street reacts without major swings, while investors are already looking ahead to the December meeting.
The Fed holds rates steady: what was decided on 28 October
On Wednesday 28 October 2026, the Federal Reserve (Fed), the central bank of the United States, decided to keep the target range for the federal funds rate unchanged at 3.75–4.00%, choosing a pause after the 25-basis-point increase announced on 16 September. The decision, widely expected by financial market participants, does not, however, signal an end to the fight against inflation. On the contrary, the Federal Open Market Committee (FOMC) statement and Chair Kevin Warsh’s subsequent press conference reveal a central bank still concerned about persistent price pressures and determined to bring inflation back towards its 2% target.
The decision passed by 10 votes to 2. Governor Lisa D. Cook and Federal Reserve Bank of Cleveland President Beth Hammack would have preferred to raise the benchmark rate immediately by a quarter of a percentage point, taking it to 4.00–4.25%. This is an important distinction: the disagreement is less about the need to keep monetary policy focused on price stability than about the best time to act again. The majority considered it preferable to gather more information about the economy and inflation before changing borrowing costs once more.
The federal funds rate is the rate at which US banks lend reserve balances to one another overnight, meaning for a single night. The Federal Reserve sets a target range and uses various operational tools to keep the effective rate close to that range. It is not directly the rate that households and businesses pay on their loans, but it influences lending terms alongside market yields, credit risk and the economic outlook. This is why every FOMC decision matters well beyond the US banking system.
A more optimistic statement on growth, but continued concern about inflation
One of the most significant aspects of the decision is not what the Fed did, but how it described the US economy. Compared with its September meeting, the FOMC upgraded its assessment of growth from expansion at a solid pace to expansion at a strong pace. While acknowledging that uncertainty remains elevated, partly because of geopolitical developments, the Committee highlighted resilient domestic spending, robust investment and productivity growth. On the labour market, it observed that job gains had broadly kept pace with growth in the workforce and that the unemployment rate had changed relatively little.
This assessment matters because the Fed operates under a dual mandate: to pursue maximum sustainable employment and price stability. When the economy is weak and unemployment is rising rapidly, further interest rate increases could worsen the slowdown. When consumption, investment and employment remain relatively strong, however, the central bank has more room to focus on containing inflation.
The statement contains no explicit commitment to raise rates at the next meeting. The Fed made clear that additional information would be needed to identify the most appropriate policy stance to bring inflation back towards 2% in a timely manner. This wording permits two compatible interpretations: on the one hand, the central bank does not consider an immediate increase essential; on the other, it does not yet believe that the conditions have been met to declare the rate-hiking phase over.
Holding rates steady therefore does not necessarily amount to adopting expansionary monetary policy. Borrowing costs continue to influence consumption, investment and financing decisions; how restrictive they actually are also depends on expected inflation and the economy’s overall conditions.
Why US inflation remains a concern
The Federal Reserve’s caution is explained in part by the latest price data. According to the Bureau of Labor Statistics, in September 2026 the Consumer Price Index (CPI), the US measure of consumer prices, rose by 0.6% compared with August and by 3.7% compared with September 2025, accelerating from the previous month’s annual rate of 3.4%.
The increase was driven primarily by energy. Gasoline prices rose by 9.1% in a single month and accounted for more than half of the monthly increase in the overall index. Core inflation, which excludes food and energy to reduce the influence of the most volatile components, also remains worth watching: it stood at 2.6% year on year in September.
Producer prices provide another sign of pressure. The Producer Price Index (PPI), which measures changes in prices received by producers, rose by 1.3% in September and by 6.3% year on year for the final-demand aggregate. Faster producer price inflation does not automatically or fully feed through to consumer prices. Increases in the costs businesses face can squeeze their margins or prompt them to raise selling prices, helping to keep inflationary pressures elevated.
These indicators must, however, be distinguished carefully. The Federal Reserve’s 2% target refers to inflation measured by the Personal Consumption Expenditures Price Index (PCE), rather than directly by the CPI. The PCE measures the prices of personal consumption expenditures using a different methodology and weighting structure. CPI inflation of 3.7% is therefore an important signal of inflationary pressures, but it must not be confused with the reading of the measure on which the central bank’s target is formally based.
The Fed also faces a particularly delicate problem: some inflation comes from supply-side factors, such as energy costs and geopolitical tensions, over which interest rates have only limited and indirect influence. Raising borrowing costs does not produce additional oil or resolve supply-chain disruptions. It can, however, restrain aggregate demand, prevent initial price increases from spreading to a growing number of goods and services, and help keep inflation expectations under control.
Kevin Warsh: inflation remains the priority, but the effects of measures already taken need time to be assessed
During the press conference following the decision, Federal Reserve Chair Kevin Warsh reiterated that price stability remains a fundamental objective of the central bank. Warsh acknowledged that inflation is still too high, but also explained that the US economy is showing signs of strength and that the effects of monetary tightening need to be assessed over time.
According to the indications he gave reporters, economic growth in the third quarter may have exceeded 3%, while business investment appears to be continuing to expand rapidly. These were assessments expressed by the Chair during the press conference, rather than new official projections published by the FOMC alongside its statement.
Warsh also stressed that financing conditions have already tightened in some parts of the economy. Certain categories of borrowers face more demanding credit conditions, while investors are becoming more selective in allocating capital. This process can help slow inflation even without another immediate change in the federal funds rate. However, the Chair distinguished tighter credit from an overall assessment that financial conditions are already restrictive, a judgement he declined to make.
One of the central questions is precisely how long it takes for monetary policy decisions to have their effects. Monetary policy operates with variable and hard-to-predict lags: an increase in an official rate quickly affects some financial instruments, but it can take many months to alter consumption, investment and ultimately inflation significantly.
From this perspective, the decision on 28 October can be interpreted as an attempt to avoid two opposing risks: acting too slowly and allowing inflation to become entrenched, or raising rates too far and causing a sharper economic slowdown than necessary. Neither possibility can be ruled out simply by observing today’s decision.
Warsh also rejected the idea that the Fed might permanently accept an inflation target above 2%, reiterating that the central bank does not intend to replace its official goal with an implicitly higher threshold.
Why high interest rates affect businesses, mortgages and financial markets
Monetary policy transmits to the economy through several channels. The first is credit: high borrowing costs tend to make new loans and variable-rate borrowing more expensive, potentially affecting household consumption and business investment. The second is the bond market, where expectations of future policy rates and inflation influence the yields investors demand. The third directly affects the value of financial assets.
To understand this last connection, it is worth recalling that a share’s theoretical price depends on the cash flows the business can generate in the future, appropriately discounted. In financial valuation models, a higher discount rate reduces the value assigned today to future profits, assuming expected cash flows remain unchanged. This effect can be particularly pronounced for companies whose valuations depend to a considerable extent on results expected many years ahead.
Consider a purely illustrative example. If an investment generated a single cash flow of 100 euros in ten years, its present value at a discount rate of 5% would be approximately 61.39 euros. Raising that rate to 7% would reduce the present value to about 50.83 euros. The future cash flow would not have changed, but the investor would assign a lower value to the same amount today because of the higher required return.
This mechanism is particularly relevant to the Nasdaq Composite, which has a significant concentration of technology businesses and companies with high growth expectations. It does not mean that every interest rate increase must cause the Nasdaq to fall: share prices depend simultaneously on earnings expectations, the economic outlook, risk appetite and many other factors. It does mean, however, that unexpected changes in the cost of capital can quickly alter valuations.
The issue also matters for companies developing artificial intelligence. Data centres, semiconductors and computing infrastructure often require very large capital expenditures, commonly known as CAPEX (Capital Expenditures). When these investments are financed through new debt, the level of interest rates can affect their profitability and sustainability. Even businesses financed mainly with equity must still consider the opportunity cost of the capital they deploy.
How the S&P 500 and Nasdaq reacted to the decision
Wall Street’s immediate reaction to the Federal Reserve’s decision was relatively muted. A decision already widely anticipated by market participants tends to produce smaller moves than an unexpected announcement, because much of the expectation is incorporated into prices even before the statement is published.
During Warsh’s press conference, Reuters recorded temporary gains of around 0.2% for both the S&P 500 and the Nasdaq Composite. In a subsequent market snapshot, the indices remained close to unchanged: the S&P 500 was up 0.05% and the Nasdaq Composite down 0.13%, while the Dow Jones Industrial Average recorded a gain of 0.10%. These figures are snapshots taken during the session and should not be confused with a final account of the full trading day.
The bond market’s response was more varied. During the afternoon, the yield on ten-year US Treasuries stood at around 5.04%, up approximately five basis points from the previous session, while the two-year yield fell in one of the readings taken after the press conference began.
The distinction matters. Short-dated government bonds tend to be particularly sensitive to expectations of the Federal Reserve’s next moves, whereas longer-dated bonds also reflect expectations of future inflation, economic growth and the premium investors require to hold longer-maturity debt.
The limited movement in equity indices should therefore not automatically be read as a positive judgement on monetary policy. Investors may have taken October’s decision without surprise while simultaneously revising their expectations for the following months. During the 28 October session, market attention was also focused on quarterly results from major technology companies, including Microsoft and Alphabet, due after the closing bell.
The next meeting in December: how likely is another rate increase?
The Federal Reserve’s next meeting is scheduled for 8 and 9 December 2026. It will be particularly important because, alongside the interest rate decision, new economic projections from FOMC participants will be published.
These documents include the so-called dot plot, a chart showing policymakers’ individual assessments of the appropriate level of interest rates over the coming years. The dot plot is not a binding programme: each dot represents an individual judgement that can change as economic conditions evolve.
According to Reuters readings based on the CME FedWatch tool, following the decision on 28 October markets assigned a probability of approximately 87.4% to a 25-basis-point rate increase at the December meeting, up from 78.3% in the previous session. This probability is an estimate implied by the prices of financial contracts, rather than an official Federal Reserve forecast or a guarantee that the increase will occur.
If the FOMC did raise rates by a quarter of a percentage point, the new target range would become 4.00–4.25%. The decision will nevertheless depend on the economic data available by then, new information about inflation and Committee members’ assessment of the effectiveness of measures already taken.
Among the most relevant indicators are the forthcoming releases on PCE inflation, the labour market and economic growth. A convincing slowdown in price increases could reduce the need for another move; conversely, a further acceleration in inflation accompanied by a still-solid economy could strengthen the case for monetary tightening.
Was the Fed’s decision right? Two possible interpretations
The decision to hold rates steady can be assessed from two different economic perspectives.
Under the first interpretation, the Federal Reserve was right to wait. September’s rate increase has not yet had time to transmit its full effects to the real economy. Some recent inflation also reflects energy prices and international factors that monetary policy cannot eliminate directly. An overly aggressive response could therefore unnecessarily curb economic activity, increasing the risk of recession without resolving the original causes of the price shock.
From a more hawkish perspective, however, the available data already justified a second increase. Inflation remains above the desired level, the economy continues to demonstrate a healthy capacity for growth, and the labour market does not, in the Fed’s official assessment, show sufficiently severe signs of deterioration to preclude further action. Waiting too long could allow inflation expectations to rise, making larger rate increases necessary later.
The fact that two FOMC members voted for an immediate increase shows that both concerns are present in the monetary policy debate. The fundamental difference is not about the importance of price stability, but about how best to achieve it while minimising the costs to economic activity and employment.
This distinction also helps explain why a decision to leave rates unchanged can be interpreted as relatively hawkish. The Fed did not raise the official cost of borrowing today, but it did not promise future cuts either. The prospect of further increases keeps investors focused on interest rate risk.
The implications for equity and bond investors
For investors, the decision on 28 October confirms that market performance over the coming months will depend not only on corporate earnings, but also on changing interest rate expectations. Persistent inflation may reduce the scope for rapid monetary easing, influencing the cost of capital and company valuations.
In equity markets, this scenario calls for particular attention to companies with high valuations, substantial debt or investments that will generate economic returns only over the long term. Strong revenue growth does not automatically guarantee greater shareholder value, especially when the investments required to deliver that growth become more expensive.
In bond markets, high interest rates can offer attractive yields on new issues, but also expose existing securities to price fluctuations. When market-required yields rise, the price of fixed-rate bonds tends to fall, and vice versa. The strength of this relationship depends primarily on modified duration, an indicator that approximates a bond price’s sensitivity to changes in the required yield.
It is therefore incorrect to conclude that a future Fed rate increase must necessarily cause stock markets to crash or losses across all bonds. Markets react primarily to differences between actual events and prior expectations. A widely anticipated increase may have limited effects; an unexpected decision, or a sudden change in the economic outlook, could instead produce sharper swings.
Conclusion: no further increase in October, but the fight against inflation continues
The Federal Reserve’s decision on 28 October 2026 does not mark an expansionary turn in US monetary policy. Keeping rates at 3.75–4.00% primarily reflects a desire to assess new economic data after September’s move, against a backdrop of still-elevated inflation and a relatively resilient economy.
The split vote, the upgraded assessment of growth and Chair Kevin Warsh’s comments suggest that the FOMC does not consider its work complete. At the same time, the central bank has not announced a predetermined path: future decisions will continue to depend on how prices, employment and financial conditions actually evolve.
The main message is that the Fed has chosen not to raise rates today, rather than ruling out increases in the future. This is a fundamental distinction for understanding the market reaction and interpreting the economic outlook for the months ahead.
The December meeting will therefore be a key moment in determining whether October’s pause was merely a temporary interval between two increases or the beginning of a more prolonged period of stable interest rates.