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Essentials of Monetary Policy

Another Rate Hold as the Surge in Bond Yields Does the Federal Reserve’s Work for It

November 1, 2023
Francis Généreux
Principal Economist

According to the Federal Reserve (Fed)

  • The Committee decided to maintain the target for the federal funds rate in a range of 5.25% to 5.50%.
  • Recent indicators suggest that economic activity expanded at a strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation remains elevated.
  • The U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.
  • In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.



Once again, the Fed’s decision came as no surprise. The second straight hold had been telegraphed recently by several Fed officials and called by all 110 forecasters surveyed by Bloomberg. It was also a unanimous decision, with all 12 voting members of the FOMC voting in favour. But when the meeting minutes are released in a few weeks, it’ll be interesting to see if everyone was on the same page during deliberations.

After all, the economic data released following their September meeting was pretty strong. Real GDP came in at an annualized 4.9% in the third quarter, and employers added 336,000 jobs in September—hardly numbers suggesting an economy slowing enough to offset inflationary pressures. So far, the US economy has held up well despite a slew of challenges, including higher interest rates, the resumption of student loan payments, the autoworkers’ strike, tighter credit conditions and growing geopolitical uncertainty. But what probably factored most into today’s decision was the recent spike in bond yields. The 10-year government bond yield is up about 100 basis points since summer. Higher bond yields mean higher retail rates, including mortgages, which are at their highest level since 2000. In other words, surging bond yields are tightening financial conditions, which should help cool the economy. The Fed alluded to this in today’s statement, adding financial conditions to credit conditions as factors that could weigh on growth.

During his press conference, Jerome Powell said, “perhaps the most important thing is that these higher Treasury yields are showing through the higher borrowing costs for households and businesses and they will weigh on economic activity to the extent that tightening persists.” But he added that the Fed isn’t yet confident that financial conditions are restrictive enough to finish the fight against inflation. That’s why the committee didn’t close the door to further interest rate hikes if inflation doesn’t come down enough or if the labour market doesn’t slow further.



As expected, the Fed held rates steady today after pausing in September. Given the tightening effect of rising bond yields and our own forecast for economic growth over the coming quarters, the Fed could be done hiking. It will likely continue to hold until starting to cut interest rates next summer.