The Fed holds rates, but markets expect a rise in December

What happened

The Federal Reserve left its benchmark interest rate in a range of 3.75% to 4% on 28 October. The vote was 10–2: Governor Lisa Cook and Cleveland Fed President Beth Hammack wanted to raise it by a quarter point. The Fed had raised rates in September, for the first time in three years.

The statement upgraded its view of the economy, which it said is expanding "at a strong pace", and added that "the accumulation of more information" would help it decide the right policy. US consumer prices rose 3.7% in the year to September, pushed up by petrol; core inflation, without food and energy, was 2.6%.

Fed chair Kevin Warsh gave no explicit guidance, as is his practice, but described a strong economy and inflation still above the 2% goal. Futures markets continue to price a rate rise at the next meeting in December.

Why short and long yields moved apart

The two-year Treasury yield fell to about 4.7%, while the 30-year rose to about 5.34%, according to Bloomberg. This is a common pattern, and it tells you what each part of the bond market cares about.

Short-term yields follow the expected path of the Fed's rate over the next couple of years. A hold, with no promise of more rises, nudges that path down. Long-term yields also include a reward for the risk that inflation stays high for many years. If investors think the Fed is not tough enough on inflation, they ask for more to lend for 30 years. So a "softer" Fed can push long-term borrowing costs up, not down.

Fewer rate decisions

Warsh also announced that the Fed will keep eight meetings a year, but from 2027 one of them will be used for strategy discussions, with no vote on rates and no statement. That is likely to become two meetings in 2028, leaving six rate decisions a year. His argument: more data can build up between decisions. Some investors worry that fewer decision points mean bigger surprises when they come.

Where it sits in the chain

This is Link 3, expected interest rates. The oil shock lifted inflation, the Fed responded, and markets now trade every word about the next step. Those expectations feed straight into mortgage rates, company borrowing and the dollar.

What to watch

• US third-quarter GDP and the Fed's preferred inflation gauge, due at the end of October.
• The December meeting: a rise would take the range to 4–4.25%.
• Long-term yields: whether the 30-year stays above 5.3%.