Fed Holds Steady Before Democrats’ Midterm Election Victory

What Was the Fed’s Interest Rate Decision in October 2026?

• Decision: After hiking rates in September, the Federal Reserve (Fed) left the target short-term lending rate unchanged at its October monetary policy meeting.

• Target Range: This action left the federal funds target rate in a range of 3.75% to 4%.

• Vote: Two of the 12 voting Fed officials dissented, preferring a quarter-point rate hike.

Less than a week after the Fed’s rate announcement, U.S. voters awarded control of Congress to Democrats. This leaves both chambers of Congress under Democratic control for the remaining years of the Trump administration.

Why Did the Fed Leave Rates Unchanged?

After raising rates in September for the first time in more than three years, the Fed resumed its patient approach in October. With inflation remaining elevated and the midterm elections looming, policymakers opted to wait for additional data before making another interest rate move.

This waiting process includes gauging the effects of the September rate hike. At his post-meeting press conference, Fed Board Chair Kevin Warsh said that higher interest rates were finally working their way through financial markets. He noted that segments previously insensitive to rates, including artificial intelligence (AI) investment, were feeling the effects of rate hikes.

Warsh didn’t characterize conditions as alarming. Despite suggesting that financial and credit conditions had tightened, he was “unwilling and unable” to label them as tight. Instead, he noted that investors were becoming more discriminating toward projects and assets they’re willing to fund.

Meanwhile, the jobs market remains resilient, consumers and businesses continue to spend, and the economy is still expanding. These factors, together with persistent inflation and tighter financial conditions, may slow down but not stop the Fed’s tightening campaign.

Will the Midterm Election Results Influence Fed Policy?

The election results and the potential policy swings they highlight could cause the Fed to extend its pause. Perhaps most notable, a divided federal government typically reduces the likelihood of expanding fiscal spending.

Additionally, there are two key factors that could influence future economic data:

• Iran. Exit polls indicated that the war in Iran, which many investors blame for persistent cost-of-living challenges, drove voters toward Democratic candidates. In response, oil prices dropped, suggesting investors believe voter angst may lead to a near-term resolution of the Iran conflict and lower energy costs. If such a scenario unfolds, inflation would likely ease.

• Data centers. Data center construction, costs, tax incentives and resource use were defining issues in several state governor races. Voters opposed to allowing data centers in their communities fear higher electricity and other costs, as well as the depletion of water resources. Any resulting slowdown in data center growth would be positive for corporate debt and capital spending but negative for economic growth. We expect data center regulation to be a primary market mover in 2027.

What’s the Potential Impact for the Treasury Market?

As Figure 2 shows, Treasury market moves have been mixed around previous midterm elections. In the periods before and after the 11 midterm elections from 1982 through 2022, 10-year Treasury yields rose five times and declined six times. The average yield change across those 11 cycles was 23 basis points (bps).

Is the Fed on Track for a December Rate Hike?

The futures market still expects further Fed tightening, including another quarter-point rate hike in December. But Warsh once again declined to comment on future Fed policy. Warsh has previously stated he’s not a fan of forward guidance and may eliminate the Fed’s long-standing practice of forecasting potential future policy.

Following the October meeting, Warsh announced another change to Fed operations. He plans to reduce the number of rate-setting votes over the next two years. The Fed will continue to meet eight times a year, but policymakers won’t vote on interest rates or issue a post-meeting statement at every meeting.

In 2027, Warsh foresees one meeting dedicated solely to monetary policy strategy discussions, with no rate decision. In 2028, he expects to increase the number of strategy-only meetings to two, leaving only six meetings for interest rate adjustments. This change reflects Warsh’s desire to keep timely economic data and trends at the forefront of monetary policy decisions.

What's Next for Rates, Inflation and Bonds?

In our view, the economy doesn’t appear poised for rapid growth that would drive an extended Fed rate-hike cycle. It also doesn’t seem destined for a dramatic slowdown that would require Fed rate cuts. As such, we expect steady growth and at least one more Fed rate hike in the coming months, not an extended tightening campaign.

Interest rates have retreated from their recent multiyear highs, but volatility may persist. We still believe rates may move lower, and we’re positioning our interest rate exposure accordingly.

If energy prices head lower, headline inflation likely will subside. But a resilient economy may keep core inflation (excluding food and energy prices) sticky.

This is a scenario we believe may pan out, presenting opportunities among inflation-protected securities if the market’s inflation expectations continue to fall.

Monetary policy will remain an important consideration for investors, but fiscal dynamics are also a factor. With elevated federal deficits and interest costs, Treasury supply continues to rise. This helps keep bond yields higher and income potential stronger.

Today’s backdrop has created a more complex landscape for bond investors, but it’s also broadened the market’s opportunities. In this environment, we believe diversification and nimble portfolio management remain paramount. As always, we seek to identify fixed-income sectors and subsectors with the most compelling risk/reward.