The Federal Reserve kept interest rates unchanged at 3.75%–4.00% at its October meeting, despite persistently elevated inflation and continued resilience in the US economy.
The decision was not unanimous, with two of the 12 FOMC members voting in favor of another 25-basis-point rate hike. The Fed acknowledged that inflation remains elevated but emphasized the need to gather additional economic data before taking further action.
Fed Chair Kevin Warsh reiterated his opposition to forward guidance, signaling a shift toward a less predictable, more data-dependent monetary policy approach.
Warsh also announced changes to the Fed's meeting structure starting in 2027. While the FOMC will continue to meet eight times annually, one meeting in 2027 and two meetings from 2028 onward will focus exclusively on broader monetary policy strategy rather than interest rate decisions, reducing the number of rate-setting meetings to seven and eventually six per year.
Markets: muted reaction
Equities: Global equity markets traded slightly higher, with limited enthusiasm following the Fed's announcement.
Bonds: Government bond yields trading almost unchanged - US 2y yield 4.72%, US 10y yield 5.03%, Japan 10y yield 2.83% - France 10y yield 4.94%
Commodities: Oil prices move higher, WTI around USD 103/barrel and Brent around USD 114/barrel;
Precious metals stabilized, gold at USD 4’060/oz, silver below USD 54/ozCurrencies: US dollar almost unchanged - Japanese Yen almost unchanged USDJPY 158 - Swiss franc mixed
Cryptos: slightly higher - Bitcoin back above USD 81k
Volatility: The VIX index falls below 17 - The window for relatively inexpensive portfolio hedging is still there
My View: Even Fed Chair Kevin Warsh himself acknowledged that inflation remains too high. Yet, despite persistent inflationary pressures and a resilient US economy, the Fed decided to leave interest rates unchanged. To me, the decision raises serious questions about the Fed's willingness to take the necessary measures to bring inflation sustainably under control.
With the US midterm elections approaching, it appears that another interest rate hike may simply be considered too politically sensitive or economically risky at this stage. Whether political considerations played a role remains uncertain, but the timing is certainly remarkable.
My assessment remains unchanged: the Federal Reserve is still behind the curve. The next Fed decision will take place on 9 December.
The ongoing energy crisis, driven by escalating geopolitical tensions and persistent supply disruptions, continues to put upward pressure on energy prices. In my view, elevated energy prices and the resulting inflationary pressures are likely to remain higher for longer than financial markets currently anticipate.
Meanwhile, the extraordinary race for capital, particularly across the AI and technology sectors, continues. By keeping interest rates unchanged, the Fed is avoiding additional immediate pressure on financing conditions, potentially allowing the debt-financed investment boom to continue.
However, the bond market is already sending a warning signal. The US Treasury yield curve has steepened, with longer-term yields rising while shorter-term yields have remained relatively stable or declined slightly. This development suggests that investors are increasingly demanding higher compensation for longer-term inflation, fiscal and interest rate risks.
Keeping short-term interest rates unchanged does not necessarily translate into easier financial conditions. Rising longer-term borrowing costs could increasingly challenge highly leveraged companies, capital-intensive AI investments and government finances.
At the same time, equity markets appear remarkably relaxed, with the VIX trading below 17 despite the substantial risks building beneath the surface. I continue to see this as an opportunity to maintain or increase portfolio protection at relatively attractive costs.
For now, markets may welcome the Fed's patience. However, delaying further monetary tightening does not make inflation disappear. It may simply increase the price that needs to be paid later, and keeps rates higher for longer.
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