The Fed Kept Rates Steady in October, but We See Cuts in 2027

The Federal Reserve may have held interest rates steady today, but Chair Kevin Warsh said nothing to dispel the prevailing view that more hikes are coming.

At today’s meeting, the Fed kept the federal-funds rate at a target range of 3.75-4.00%. The central bank previously hiked by a quarter point in September after holding rates constant since December 2025. Before then, rates had been progressively lowered by 1.75 percentage points from a plateau of 5.25%-5.50% from July 2023 to September 2024.

While the Fed didn’t hike today, its campaign to quell high inflation isn’t over. Markets expect another three hikes (0.75 points), starting in December and continuing into next year. Those expectations didn’t shift much after today’s meeting, as Warsh said nothing to contradict the market-implied view. Warsh said that, while financial conditions may have tightened, he wouldn’t yet call them tight. He also asserted that “we haven’t delivered price stability … but we’re working on it.”

Warsh implied that whether the Fed hikes today or in December is immaterial—a view we’d certainly agree with. The financial press often obsesses over the timing of the Fed’s moves, but the ultimate trajectory of interest rates is what matters for the economy and investors.

Our view is that rates will eventually fall considerably lower than current market expectations. We expect one more rate hike this December, and then for the central bank to cut rates in the latter half of 2027 into 2028. Ultimately, we expect 1.25 percentage points in cuts from current levels, taking the federal-funds rate to a target range of 2.50%-2.75% by the end of 2028. That’s about 2 points below the current market-implied view.

A key reason for our view is that we think the AI boom has been a major factor propping up rates, but that boost is likely to fade. Either AI becomes profitable via mass layoffs, putting downward pressure on rates, or AI investment will have to drop, also putting downward pressure on rates. We are also optimistic about inflation falling.