Market Views from the Global Fixed Income, Currency & Commodities (GFICC) group
The Federal Open Market Committee (FOMC) voted to keep the federal funds rate target range unchanged at 3.75%–4.00%. There were two dissents from Fed President Hammack and Governor Cook, both of whom preferred a 25 basis point (bp) rate hike.
Changes to the FOMC Statement:
- After a significant rewrite in June, the October FOMC statement was mostly unchanged.
- On the economy, the Committee upgraded its assessment of activity from expanding at a "solid pace" to a "strong pace," despite acknowledging elevated uncertainty related to "geopolitical developments." Job gains "kept pace with the workforce," and the unemployment rate was little changed. Inflation "remains elevated," productivity was characterized as "strong," and capital investment was described as "robust."
- In line with the FOMC’s decision to remain on hold, the statement concluded that the “accumulation of more information” will help the Committee determine the appropriate policy stance to ensure the timely return of inflation back to the Committee’s 2.0% goal.
- On the appropriate path for monetary policy, the statement continued to reiterate that “the Committee will deliver price stability.”
- The statement re-affirms the current balance sheet policy to “maintain ample reserves in the banking system.”
Key Quotes from Chair’s Press Conference:
- “The Committee believes that the accumulation of more information will help determine the policy stance appropriate to ensure a timely return of inflation to the 2% goal. The information we receive over the coming period will help us determine where we want policy to be."
- “Since our policy action in September, we have started to see some changes in financial and credit conditions. They have tightened for some businesses and households, much as we would expect."
- "Market participants are becoming somewhat more discerning in their capital allocations, and while overall financial conditions are tighter, I'm unwilling or unable to call them tight."
- "The overwhelming judgment is that what we've done in this modest medicine is starting to work some."
- "Energy and related prices have moved higher again in recent weeks. And our job is to ensure that relative price changes in some sectors do not broaden out across the economy and that inflation expectations remain anchored."
- "Interest rates affect directly or indirectly almost everything. On the thrust of your question with respect to this new technology and this investment surge, do interest rates matter? I believe they do."
- "What we've seen is market participants discriminating between the kinds of investments they want to make. You've seen credit spreads for certain assets widen out."
- "We decided on a change in our schedule starting next fall. In 2027, one meeting will focus exclusively on broad monetary policy strategy, with neither a vote on the federal funds rate nor a policy statement anticipated. I expect that in 2028 we'll have two meetings dedicated to discussions of strategy and six for setting policy."
- "Economic growth is higher, but it does not tell me that economic growth is somehow causing inflation, making our job harder.”
- "Is the economy running too hot? Is the economy running too strong? That is not the judgment of most of my colleagues."
Our View:
- The Fed left the federal funds rate unchanged at 3.75%-4.00%, broadly in line with market expectations. While recent inflation readings surprised to the upside, policymakers opted to remain patient and assess whether those pressures prove persistent rather than responding to individual data releases. Since the September FOMC meeting, evidence that tighter monetary policy is beginning to work its way through financial and credit markets has reduced the urgency for additional policy restraint. Nevertheless, Chair Warsh reiterated the Committee's commitment to restoring price stability, while Fed President Hammack and Governor Cook dissented in favor of a 25bp rate hike, underscoring that a meaningful portion of the Committee remains concerned that inflation risks have not fully subsided.
- The Fed announced plans to reshape its meeting schedule beginning in 2027, retaining eight meetings per year but dedicating one meeting solely to monetary policy strategy rather than rate decisions. Warsh argued that policymakers need more time to evaluate structural issues such as inflation, productivity, artificial intelligence (AI), and the policy framework, separate from near-term rate-setting decisions. In 2028, the Fed plans to expand this approach further, with two strategy meetings and six policy meetings.
- We maintain our base case of continued expansion. Real gross domestic product (GDP) growth averaged 2.3% in the first half of 2026 and is tracking at a stronger pace in the third quarter. Business investment in sectors such as technology and AI remains robust but a broader capital expenditure (capex) boom outside of tech remains limited. The consumer has remained resilient, buoyed by tax refunds and the wealth effect, but faces headwinds from slowing real income growth, and a re-acceleration in energy costs.
- In September, we raised our fair value range for the 10-year U.S. Treasury to 4.50%-5.25% to reflect a more resilient growth backdrop, a labor market with fewer downside risks, and inflation that appears likely to remain above target for longer. After initially trading above the upper end of that range, yields have retraced and now sit slightly above the midpoint of our expected range. We expect yields to remain elevated as economic activity remains firm and labor market conditions continue to hold up. Stable long-term inflation expectations, alongside long-dated real yields already near cycle highs, should limit the scope for a sustained move meaningfully above the top end of the range. Looking ahead, yields can stay elevated while activity remains firm, but they should be more sensitive to downside surprises in incoming data or to downward revisions in expected growth.