US Federal Reserve Pauses Rate Hikes in October 2026

FED OCTOBER POLICY – A PAUSE, AS EXPECTED

In the previous 16-Sep Fed meet, the Federal Open Market Committee (FOMC) had hiked rates by 25-bps to the range of 3.75%-4.00%. The consensus was for another rate hike in 2026, but it was not clear whether the rate hike would happen in October or in December. In the last few days, it was looking increasingly likely that the Fed would pause in October and use the benefits of more data points to take a call in December. When the Fed statement was made by Kevin Warsh late on 28-October, it was status quo on rates.

Kevin Warsh has not been a greater believer in forward guidance; and that was a point he again reiterated in the Fed statement. In fact, Warsh has also hinted that he may look to reduce the number of rate setting meetings in future years, although that may be debatable. In a sense, the decision to hold rates was a balancing act. The Republicans had been unhappy with the rate hike in September, so ahead of the mid-term elections, this was a safe bet. However, there were 2 dissent votes; calling for a 25-bps rate hike in October.

WHAT WE READ FROM THE OCT-2026 FED POLICY STATEMENT

Here are key takeaways from the Fed policy statement released on October 28 2026.

The decision to hold rates at the level of 3.75% to 4.00% went through with a 10:2 vote. Two FOMC members; Lisa Cook and Beth Hammack dissented and called for a 25-bps rate hike in October to underline that the Fed was serious about price stability.

The demand for a rate hike by the two dissenting votes was logical. Inflation continues to be inordinately high and the economic growth continues to remain robust. The only data point favouring a pause was the 10-year bond yields tapering to 4.97% in October. However, 2-year bond yields at 4.714% are a concern for now.

Kevin Warsh has also proposed a new arrangement from 2028, wherein there would be 2 strategy meetings and only 6 rate setting meetings during the year. This will reduce the number of rate changes and also the need for continuous forward guidance.

Kevin Warsh underlined that the upcoming mid-term elections did not have any impact on the decision to pause on rates. That may be a moot point. Warsh underlined that the idea was to await more data points before taking a directional call.

In terms of recent data points; PCE inflation was at 3.4%, Unemployment at 4.2%, and GDP growth at 2.2%. According to Warsh, the Fed continued to put price stability above all else. Inflation had shown signs of plateauing with core inflation under 2.6%.

Regarding his follow-up to the rate hike of 25-bps in September, Kevin Warsh underlined that there had been tightening of financial and credit conditions after the rate hike. Investors were becoming more discerning on capital allocation. The Fed wants to give more pathway to allow the previous rate cut to get fully absorbed.

Fed has suggested that it will need to accumulate more information before any affirmative action on rates. The Fed has suggested that it remains committed to reverting inflation to the 2% level, but the actions in October seem out of sync. The hint is that Fed may act in December with more data points in place.

Markets are concerned that there was a gap between what the Fed has been talking about (price stability) and the follow-up action. The market view is that another rate hike in October would have actually underlined the Fed’s commitment.

Interestingly, Kevin Warsh had first highlighted the importance of forward guidance by the Fed during the 2008 crisis. His stand now is that; while forward guidance added value in a crisis, it does not add much value in normal times.

To sum up; the Fed policy statement in October seems to be driven less by the economic demands and more by the need to remain neutral ahead of the mid-term elections. That may not be good news for the future direction of Fed policy.

Going ahead, Fed not only wants to underplay forward guidance, but also wants to reduce the number of rate setting meetings. It seems to be an interesting shift!

WHAT WE READ FROM THE CME FEDWATCH?

CME Fedwatch simulates rate scenarios based on Fed Fund futures prices. Here are the probabilities across key meetings over next 2 years. Shaded column is current Fed rate.

Here are some key takeaways from the CME Fedwatch probabilities.

CME Fedwatch shows 78.4% probability of a 25-bps rate hike in December. Post the mid-term elections, the probability of one more rate hike in 2026 remains high; especially considering that inflation continues to be sticky and growth is still quite robust.

For calendar year 2027, the toss-up is between a 25-bps rate hike and a 50-bps rate hike by end of the year. It shows a high probability of 1 rate hike of 25-bps in 2027 and a neutral probability of 2 rate hikes. However, CME Fedwatch has also been finding it difficult to give meaningful projections with limited forward guidance from the Fed.

Will the Fed decision have an impact on India?

FED PAUSE MAY NOT MEAN MUCH FOR INDIA

The Fed rate hike was along expected lines. However, it is likely to impact India in 3 ways.

While the pause reduces the pressure on RBI to hike rates, we may still see a rate hike in December considering that the rupee really needs some solid support.

RBI has hiked rates by 25-bps in October, but inflation continues to be well above the median levels. Another rate hike in December may help to quell the excesses.

One positive factor for India will be the reduced investments in AI globally due to higher cost of funds. This could push FPI flows back into India.

Fed has paused ahead of the mid-term polls in the US. However, it may find it tougher to avoid a rate hike in the upcoming December 2026 Fed meeting.