Fed Expected to Hold Rates in October With a December Increase Still in Play
The Federal Reserve meets Oct. 27 and 28 for a Federal Open Market Committee meeting to decide the target range for the federal funds rate, its benchmark interest rate. The current target range is between 3.75% and 4.00%. At its September meeting, the Fed raised rates by 0.25 percentage point, its first increase since 2023.
The market’s center of gravity leans toward a hold. According to CME FedWatch, rate futures markets are pricing in roughly an 82% probability that rates stay unchanged at this meeting. On the prediction market Kalshi, the probability of a hold also came in around 85%. In a Reuters survey of 100 economists conducted Oct. 16 to 20, 94 expected a hold.
But expectations of a hold do not mean the tightening cycle is over. All 100 economists who responded to the Reuters survey expected a rate increase at the December meeting. Some push back that even the October meeting is open. MarketWatch reported that some institutions, including Oxford Economics, expect back-to-back increases in October and December.
Behind it sits inflation pressure that has not cooled. According to the Labor Department’s Bureau of Labor Statistics, the consumer price index rose 3.7% in September from a year earlier and was up 0.6% from the previous month. Gasoline prices jumped 9.1% in a single month, accounting for more than half of the monthly increase. Core prices, excluding food and energy, also rose 2.6% from a year earlier, above the Fed’s 2% target.
The bond market is already pricing in the possibility that high rates will last a long time. The yield on the 10-year U.S. Treasury note was moving around 5.1% as of Oct. 20. The 10-year Treasury yield is the interest rate the government pays to borrow money for 10 years and serves as the benchmark for long-term rates, including mortgages.
The path by which the Fed’s benchmark rate reaches households differs by product. The federal funds rate is the rate banks charge each other to lend money overnight. When it moves, the prime rate, the rate banks apply to their best customers, moves with it. The prime rate is currently 7.00%. According to Bankrate, the prime rate is typically set about 3 percentage points above the federal funds rate.
That is why credit card rates react first. Most card rates are variable rates tied to the prime rate, so when the benchmark rate rises, card rates follow within one or two billing cycles. In Federal Reserve statistics, the average rate on card accounts actually assessed interest is above 22%. The average rate on new card offers compiled by LendingTree was also 23.82%.
Mortgages are a different story. According to Freddie Mac, the average rate on a 30-year fixed-rate mortgage was 7.40% as of Oct. 15, unchanged from the previous week. That rate does not directly follow the short-term rate the Fed sets. Because lenders lend money for decades, they price loans by first weighing where inflation and the economy are headed. The benchmark for that judgment is the 10-year Treasury yield.
So even if the Fed holds rates, there is no guarantee mortgage rates will fall. As long as the 10-year Treasury yield stays above 5%, the base cost of long-term borrowing itself remains high. Conversely, even if the Fed raises rates, mortgage rates could actually fall if markets expect an economic slowdown and long-term rates decline.
Deposit rates also do not move at the same speed as the benchmark rate. According to the Federal Deposit Insurance Corporation, the national average deposit rate is just 0.38%. By contrast, high-yield savings products, centered on online banks, offer rates in the low 4% range. The Wall Street Journal reported that the average rate on the top 1% of deposit products was 4.02%. Banks differ in how much they need to attract funds, so the speed at which they pass increases on to depositors varies.
In the end, the impact of this meeting is more likely to turn on the wording of the statement and the press conference than on a single line of the decision. Even if a hold is decided, if the Fed leaves strong room for a December increase, Treasury yields could rise and put fresh pressure on mortgage rates. Conversely, if signals of easing inflation are emphasized, long-term rates could react first.
The Fed’s decision will be announced Oct. 28 at 2 p.m. Eastern time, followed by a press conference by Chair Kevin Warsh. Warsh has refrained from providing advance guidance on the future rate path. Markets are expected to keep weighing the narrow gap between a hold and an increase until the next inflation and jobs data arrive.
