Market data through 28 October 2026Read the analysis
Why borrowing costs move
during a Fed pause
The Federal Open Market Committee (FOMC), the Fed’s rate-setting body, left the federal funds target range at 3.75% to 4.00%. Lisa Cook and Beth Hammack preferred a 25-basis-point increase. The majority chose to wait for further evidence while describing strong economic activity, robust capital investment and elevated inflation. The statement offered no commitment to hold rates at subsequent meetings.[1]
The Fed sets a target for an overnight interest rate. A 10-year Treasury yield reflects the expected path of short-term rates and a term premium, the compensation investors require for bearing interest-rate risk over the bond’s life. Changes in growth expectations, inflation, Treasury supply or demand for safe assets can affect either component.[2]
On 28 October, the 2-year Treasury yield fell by 3 basis points to 4.67%, while the 10-year yield rose by 6 basis points to 5.05%. The gap between them widened from 29 to 38 basis points. The long-term government borrowing benchmark moved higher, increasing the starting point for pricing many private-sector loans and bonds.[3]
A higher Treasury benchmark need not translate into an equal increase in mortgage or corporate borrowing rates. Changes in credit spreads, lender margins and other pricing factors can offset or amplify it. Nor can a daily yield change isolate the effect of the Fed’s announcement.
US Treasury yields
The curve became steeper
Compare selected maturities before and on the day of the decision.
View the underlying figures
| Maturity | 27 Oct | 28 Oct | Change |
|---|---|---|---|
| 2 years | 4.70% | 4.67% | −3 bps |
| 5 years | 4.82% | 4.85% | +3 bps |
| 10 years | 4.99% | 5.05% | +6 bps |
| 30 years | 5.30% | 5.37% | +7 bps |
How higher yields affect
investment and valuation
The 10-year inflation-protected Treasury yield rose from 2.64% to 2.67% on the same day. The difference between nominal and real par yields increased from approximately 2.35% to 2.38%. Both components contributed 3 basis points to the 6-basis-point rise in the nominal yield.[3][4]
The nominal–real yield spread provides an approximate measure of inflation compensation. It also incorporates inflation risk and liquidity differences between the securities, so it cannot be read as a pure forecast of consumer-price inflation. A higher real yield, meanwhile, can reflect a higher expected path of real short-term rates or a larger premium for bearing long-term risk.
Higher real yields increase the inflation-adjusted return available on government debt. A company seeking funding must offer a competitive expected return for the additional risk investors take. Projects that appeared viable at a lower cost of capital may then require stronger cash flows, a smaller initial investment or a lower purchase price to remain attractive.
For shareholders, the timing of those cash flows also matters. A higher required return has a larger proportional effect on a payment due further in the future. A business whose expected cash generation lies many years ahead is therefore more exposed to a discount-rate increase than one with otherwise comparable cash flows arriving sooner. Productivity gains can offset this effect if they increase the cash ultimately available to investors.
10-year Treasury yields
Two components moved higher
An approximate decomposition of nominal par yields.
How productivity moderates
labour cost pressure
Inflation pressure depends on demand relative to the economy’s capacity to supply goods and services. When output per hour rises, businesses can produce more with the same hours worked. Stronger output growth can then coexist with moderate growth in labour costs per unit of production.
Nonfarm business productivity increased by 2.2% year on year in the second quarter, while unit labour costs rose by 1.4%. The quarterly annualised productivity increase was 1.4%. The annualised quarterly figure measures the pace within Q2, while the year-on-year figure compares output per hour with Q2 2025.[5]
Unit labour cost is hourly compensation divided by real output per hour. If compensation rises by 4% and productivity by 2%, labour costs per unit increase by approximately 1.96%. Productivity absorbs part of the compensation increase. Other production costs, profit margins and competition determine how far the remaining cost pressure reaches selling prices.
Illustrative calculation
How productivity affects unit labour costs
Set annual growth in hourly compensation and output per hour to calculate the implied change in unit labour costs. Compensation includes pay and employer benefit costs.
(1.04 ÷ 1.02 − 1) × 100 = 1.96%
Higher output per hour absorbs part of the increase in compensation.
Presets hold compensation growth at 4%. The formula is (1 + compensation growth) ÷ (1 + productivity growth) − 1, with growth rates expressed as decimals. This is an accounting relationship, not an inflation forecast. Labour costs are one input into prices and the calculation does not attribute productivity gains to any particular technology.
Productivity can also raise demand for capital
When productivity improvements make investment more profitable, firms may seek more funding. Higher expected future income can also reduce households’ incentive to save. Greater investment demand relative to available savings can raise the neutral real interest rate, the inflation-adjusted rate that would neither stimulate nor restrain an economy operating at sustainable capacity. This unobservable policy benchmark differs from the market-based 10-year real Treasury yield. The relationship is not stable enough to infer a change in interest rates from productivity alone. This mechanism does not establish what caused the October move in Treasury yields.[6]
The distribution of productivity gains matters as well. Competition may pass some cost savings to customers through lower prices, while wage bargaining may transfer part to employees. Shareholders benefit from the cash left after these adjustments and the investment required to achieve them. Higher output per hour therefore supports the earnings outlook most convincingly when it is accompanied by better returns on capital and stronger cash generation.
Higher project returns can sustain investment at higher rates.
If expected project returns rise faster than financing costs, investment can remain attractive at higher interest rates. If financing costs rise without a corresponding improvement in cash-flow prospects, fewer projects will meet investors’ required return.
The evidence behind
the next policy decision
September Consumer Price Index (CPI) inflation was 3.7% year on year, with core CPI at 2.6%. Energy prices were 20.4% higher.[7] August personal consumption expenditures (PCE) inflation, the latest PCE reading available for the decision, was 3.4%, with core PCE at 3.0%.[8] Both core measures exclude food and energy. The Fed’s 2% target applies to headline PCE inflation over the longer run. CPI and PCE differ in coverage and weights, so these readings should be assessed within their respective series.[9]
September payrolls increased by 29,000, compared with an average monthly gain of 45,000 over the preceding 12 months, and unemployment was 4.2%. A low payroll gain alone does not demonstrate a collapse in demand or prove a productivity breakthrough. Labour supply, hours worked and the composition of hiring also shape the relationship between employment and output.[10]
September’s projections placed the year-end policy rate above the October level for most participants. Of 18 year-end policy-rate projections, 12 were at a midpoint of 4.125% and four at 4.375%. Two were at 3.875%, the midpoint of the October target range. The October hold did not update or reaffirm those individual projections. It left the Committee free to reassess the required rate path as new evidence arrived.[11]
September 2026 projections
Where participants placed the year-end rate
Number of participants by projected federal funds rate midpoint for the end of 2026.
Inflation persistence
Persistent core PCE and services inflation would strengthen the case for continued restraint even if energy inflation eases. Slower price growth across several releases would strengthen the case for waiting.
Productive capacity
Sustained output growth alongside modest unit labour cost increases would support the view that supply capacity is improving. Capital spending without measurable efficiency gains would provide weaker evidence.
Financing conditions
Higher Treasury yields accompanied by wider credit spreads and tighter lending standards would indicate a broader financing squeeze. Narrower spreads could cushion borrowers against the rise in government yields.
Higher revenue or earnings growth can coincide with a lower equity value when delivering that growth consumes more capital, takes longer or requires a higher risk premium. Investors therefore need to compare the present value of the additional cash flows with the investment required to generate them.
Sources and methodology
This article assesses the Federal Reserve’s decision on 28 October 2026 using economic releases available by that date and that day’s Treasury market observations. Market comparisons use US Treasury daily observations for 27 and 28 October. It does not incorporate GDP or PCE releases scheduled for 29 October. Policy projections are from September, productivity data refer to Q2, CPI and employment figures refer to September, and PCE figures refer to August. The market observations include trading after the policy announcement and cannot be treated as information available when the vote was taken.
- Federal Reserve — FOMC statement, 28 October 2026. Target range, vote, dissenters and assessment of economic conditions.
- Federal Reserve Bank of New York — Treasury term premia. The distinction between expected short-term rates and compensation for interest-rate risk.
- US Treasury — daily nominal par yield curve, October 2026. Selected maturities and our calculations of daily changes and the 2-year to 10-year spread.
- US Treasury — daily real par yield curve, October 2026. The nominal–real difference is an approximate inflation-compensation measure, rather than a zero-coupon breakeven rate or a pure inflation forecast.
- Bureau of Labor Statistics — Q2 2026 productivity and costs, revised. Release dated 3 September 2026. The interactive example uses the definition of unit labour costs and hypothetical growth assumptions.
- Federal Reserve Bank of Cleveland — Productivity Growth and Real Interest Rates in the Long Run. The theoretical mechanism and the limits of the empirical relationship.
- Bureau of Labor Statistics — September 2026 Consumer Price Index. Headline, core and energy inflation.
- Bureau of Economic Analysis — personal income and outlays, August 2026. Headline and core PCE inflation.
- Federal Reserve — the longer-run 2% inflation objective. The target is defined using the annual change in the PCE price index.
- Bureau of Labor Statistics — September 2026 Employment Situation. Payroll growth, its preceding 12-month average and unemployment.
- Federal Reserve — September 2026 Summary of Economic Projections. Individual year-end federal funds rate projections.
The analysis of transmission mechanisms and asset valuation is our interpretation. Daily market changes do not identify causal contributions. Illustrative calculations are not forecasts, quoted borrowing terms or investment recommendations. Dated BLS archive releases are used to preserve the original reference periods.