Fed holds rates steady despite inflation being too high

The Fed’s hawkish hold keeps a December rate hike likely and supports a move in the 10-year Treasury yield toward 5.25%, while the dollar should remain broadly firm.

• The FOMC voted 10-2 to keep the federal funds target range at 3.75%-4%; only 2 basis points of a 25-basis-point hike had been priced in, and just 6 of 97 Bloomberg-poll respondents expected an increase.
• The statement still described inflation as elevated, while Chair Kevin Warsh said inflation remained too high but that the policy “medicine” was beginning to work and that the Fed would deliver 2% price stability.
• Two jobs reports and the November CPI release will arrive before the December meeting; the authors therefore expect a hike to 4.00%-4.25%, followed by a prolonged pause through December 2027 and a reversal of the December 2026 hike.
• Their inflation outlook assumes lower Persian Gulf shipping and insurance costs, 3% wage growth and further housing disinflation; these factors could bring US inflation back to 2% in the second half of 2027.
• Treasury yields initially rose after the decision before the 10-year yield returned toward 5%, while the dollar softened slightly; strong US growth and above-target inflation should limit any dollar correction.

Takeaway: Investors should prepare for a near-term Fed hike and higher long-end yields, although the outlook depends on lower energy-related costs and incoming employment and inflation data.