Fed holds course—for now
As expected, the Federal Reserve ended its second-to-last policy meeting of the year with a pause, leaving the benchmark fed funds rate in its target range of 3.75%-4%:
Source (data): Federal Reserve. Values represent upper end of Fed funds target range. (For illustrative purposes. Not a recommendation.)
Although US crude oil prices have spent almost all of October above $90 (climbing as high as $103.24) and this month’s Consumer Price Index (CPI) and Producer Price Index (PPI) readings showed hotter-than-expected inflation, the market-based odds that the Fed would leave interest rates unchanged hovered around 90% in the days leading up to this week’s meeting.1
Any uncertainty appears to be more about the timing of policy tightening, rather than the need for it.
While persistent inflation argues for additional hikes, the risks of overtightening favor a gradual approach, according to Morgan Stanley & Co. economists, who anticipate two more 25-basis-point (0.25%) hikes, in December and March. Fed Chairman Kevin Warsh, they note, will likely signal further tightening while emphasizing a gradual, “trend-dependent” approach.2
They add that an absence of dissenting votes in today’s meeting, financial stability concerns, or a benign inflation assessment would be “dovish signals,” while three or more dissenting votes (for hikes), explicit tightening guidance, or heightened concerns about inflation and energy spillovers would be hawkish.
Earlier this week, Morgan Stanley & Co. strategists pointed out that financial conditions have tightened significantly over the past several months, with the Fed beginning to hike rates (but offering little insight into how many times it will do so), a reduction in the growth of the Fed's balance sheet, and higher energy prices. This tightening, they explain, is “weighing on risk assets and will likely linger into November and/or until market developments lead the Fed to pivot.”3
Note: The Fed’s next policy meeting is scheduled for December 8-9, 2026.
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1 CMEGroup.com. FedWatch Tool. 10/27/26.
2 MorganStanley.com. October FOMC Preview: Expect the Policy Rate Will Move Higher, Just Not This Month. 10/23/26.
3 MorganStanley.com. Weekly Warm-up: Clearing Events Still Ahead. 10/26/26.