Weekly Update 10/30/2026: Fed Keeps Rates Steady

• Fed preferred inflation stat getting hotter
• New home sales fall
• Gross Domestic Product accelerates from second quarter
• Oracle announces cash flow positive news
• Coke reports solid results
• Boeing resets expectations
• UPS ‘glide down’ plan appears to be working
• …and many, many more earnings reports. Read on!

FOMC

The Federal Open Market Committee (FOMC) voted 10-2 to hold its benchmark federal funds rate in a range of 3.75%-4.00%. Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented, preferring to raise rates by a quarter percentage point (0.25%). Cook’s dissent is noteworthy given President Trump’s efforts to remove her from the FOMC. She has expressed concerns in the past that persistent supply shocks make it difficult for the Fed to “look through” such events as they normally would do, suggesting that they are becoming more salient and thus deserving of a response.

“The accumulation of more information will help the committee determine the policy stance appropriate to ensure a timely return of inflation to the committee’s 2% goal,” policymakers said Wednesday in a post-meeting statement. “The committee will deliver price stability.”  Stronger-than-expected economic activity has led to solid consumer spending and obstinate inflationary pressures partially because of events in the Middle East but also due to the prodigious spending on AI-related operations and infrastructure. “It’s our responsibility to get inflation down,” Fed Chairman Kevin Warsh said during the post-meeting press conference. “That’s the reason the FOMC’s discussion over the last couple of days focused mainly on the price stability side of our remit.”

The probability of a hike at the next FOMC meeting in early December is now close to 80%. As some pundits have pointed out, the markets are doing the Fed’s work for them through higher yields along the Treasury yield curve. The 10-year Treasury note yielded 4.75% at the start of August, a few weeks after Warsh began his term as Fed chair. After reaching 5.3% at the start of this month, it has fallen closer to 5.0% reflecting not only a stronger economy but also the threat of future inflation. While the 0.25% difference is a move the move the Fed did not have to impose through its fed funds rate, many investors realize that is not enough. First, there is a credibility issue if the Fed does not make a stand against future price increases. That is already on a bit of thin ice since inflation measured by several sources has been above the 2.0% Fed target for about six years! Second, markets tend to swing to extremes. One only needs to look back at the first few days of the Covid outbreak in 2020 or the votes on Capitol Hill in 2008 concerning $700 billion in bailout money as part of the TARP program to see that investors often vote with their feet and head towards the exits quickly, only asking questions later. The Fed cannot afford to have high inflationary expectations become “anchored” in the minds of consumers so following up tough rhetoric with actual moves is necessary.    

There was also a change to the FOMC schedule beginning in 2027. Next year there will be seven rate decisions scheduled, one less than the eight of this year. In 2028, there will be only six. The non-rate setting meetings will be focused on broad monetary policy strategy. While there are few details about these sessions, one can guess they will be decidedly “wonkish”, diving deep into economic policy and theory. There had been rumors that Warsh would adjust the FOMC schedule, including the possibility of reducing the number of meetings. This does so under the guise of policy research. It is interesting that Warsh announced this change in the FOMC schedule this week. There are five task forces he had set up to look at various aspects of policymaking, including communication, but he has decided for some reason not to wait for their findings, which he indicated are due by year’s end. In general, this underlines the theme that Warsh has been emphasizing—namely, there would be less communication from the Fed going forward. Whether that is ultimately supportive or detrimental to the Fed achieving its mandate remains to be seen.  

Inflation Trends

The Fed has a lot of work to do to tame inflation affecting the country. The Bureau of Economic Analysis (BEA) released the personal consumption expenditure (PCE) index for September rose 3.6% on annual basis and 3.1% on an annual basis excluding food and energy. Both of those figures matched the consensus in a Bloomberg survey of economists. At annualized rates, the core PCE picked up to 3.9% on a one-month basis (versus 3.2% in August), 2.9% on a three-month basis (vs. 2.2% prior) and 2.9% on a six-month basis (vs. 2.8% prior). In other words, inflation seems to be accelerating and moving further away from the stated 2.0% goal the Fed wants. The share of PCE components rising more than 3%--a metric Chairman Warsh likes to track—fell to 49% on a 12-month basis versus 53% in August.

The same report showed that nominal consumer spending rose 0.5% in September, which was slightly below the consensus estimate of a 0.6% rise. Personal income rose 0.2%, falling just short of the 0.3% consensus estimate. Of note is the fact that the saving rate declined to 3.8% last month from 4.0% in the prior month, matching its lowest level of the past three years. It is far below the 4.7% average over the past year and the 6.1% pre-pandemic average, suggesting that consumers are dipping into savings to continue their spending patterns. Real disposable incomes fell for the first time since April. The question is: how sustainable is that pattern, unless either costs fall or incomes rise (neither of which look likely recently)?    

Economic Growth

New single-family home sales fell 0.6% in September to an annualized rate of 676,000 based on data from the Department of Housing and Urban Development. That figure beat the median estimate of 651,000 annualized sales in a Bloomberg survey of economists. The median sales price fell 3.9% from a year ago to $400,400.  That was the seventh month this year to show a year-over-year price decline. Mortgage rates remain high creating a difficult obstacle for homebuyers. “Cutting prices and offering mortgage rate incentives are helping keep sales moving, but the market remains supported more by builder concessions than by strong underlying demand,” said Daniel Veilhaber, an economist at Nationwide.  

The BEA reported that U.S. GDP expanded at an annualized 3.4% pace in the third quarter. That was an increase from the 2.2% annualized pace exhibited in the second quarter and ahead of the median projection in a Bloomberg survey of economists. Spending on investments in AI contributed more to GDP than at any time since 2011 outside of the pandemic rebound. Household spending was also strong, rising at a solid 3.8% annualized clip for the second consecutive quarter, reinforcing our assessment that households continue to spend even in the face of geopolitical risks and the threat of AI taking jobs.

Net exports, which is defined as imports minus exports, subtracted 3.3 percentage points for the quarter. That was due to a mix of factors including spending on equipment for data centers in addition to spending to beat levies for tariffs before they become enacted. Inventories added 1.6 percentage points to growth as manufacturing continued producing. Inventory additions are considered contributions to growth because GDP is a measure of fabrication. Residential investment, down 3.3%, continued to subtract from overall figures as high mortgage rates restrain homebuying transactions. The average rate on a 30-year mortgage reached 7.41% in the week ended October 16. Six out of the last seven quarters recorded a decline in the residential investment category.

SGK writes additional weekly commentary for clients of the firm detailing recent events and earnings of core equity holdings.

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