Economy Grows Faster as the Federal Reserve Holds Rates Steady

Matthew Rubin Chief Investment Officer

 

1. The Federal Reserve left its target benchmark rate unchanged last week at 3.75% to 4.00%, with two members preferring an increase.
2. The U.S. economy grew at a 3.4% annual rate in the third quarter, faster than the prior quarter, while inflation measures in the GDP report cooled.
3. Initial unemployment claims fell to 194,000 last week and continuing claims declined as well, with both running well below year-ago levels.

 

1. Federal Reserve Holds Rates Steady as Inflation Stays Above Target

The Federal Open Market Committee left its benchmark interest rate unchanged last week, keeping the federal funds rate target range at 3.75% to 4.00%. The decision passed by a vote of 10 to 2, and the Committee said it would continue its policy of maintaining ample reserves in the banking system.¹

Policymakers described economic activity as expanding at a strong pace and noted that domestic spending has been resilient, productivity growth is strong, and capital investment is robust. Job gains have kept pace with workforce growth, and the unemployment rate is little changed. Uncertainty remains elevated, owing in part to geopolitical events.¹

Inflation remains above the Committee’s 2% goal. Policymakers noted that additional data will help them determine the policy stance needed to return inflation to that goal in a timely manner.¹

Two members dissented, preferring to raise the target range by a quarter point at this meeting. In related actions, the Board of Governors held the rate paid on reserve balances at 3.90% and the primary credit rate at 4.00%.¹

2. Economic Growth Picked Up in the Third Quarter as Price Pressures Eased

The U.S. economy expanded at a faster pace last quarter, according to the advance estimate^† released last week by the Bureau of Economic Analysis. Real gross domestic product grew at an annual rate of 3.4% in the third quarter, up from 2.2% in the second quarter.²

The acceleration reflected stronger investment and an upturn in government spending, with consumer spending continuing to contribute. A decline in exports partly offset those gains.²

Underlying private demand also looked firm. Real final sales to private domestic purchasers, a measure combining consumer spending and private fixed investment, advanced 4.9% after rising 4.6% in the prior quarter.²

Inflation measures within the report moderated. The personal consumption expenditures price index increased 2.1%, compared with 5.0% in the second quarter, while the measure excluding food and energy rose 2.5%.²

3. Jobless Claims Drift Lower as Layoffs Stay Contained

Applications for unemployment benefits declined again last week. Seasonally adjusted initial claims totaled 194,000 in the week ending October 24, a decrease of 1,000 from the previous week’s revised level of 195,000. The four-week moving average, which smooths out weekly swings, fell to 196,750 from 198,000.³

Claims remain well below where they stood a year ago, when initial claims totaled 221,000 in the comparable week and the four-week average measured 226,750.³

Continuing claims conveyed a similar message. The number of individuals receiving ongoing benefits fell by 21,000 to 1.70 million in the week ending October 17, compared with 1.95 million a year earlier. The insured unemployment rate held at 1.1%, unchanged from the prior week.³

Together, the figures suggest that layoff activity remains limited and that unemployed workers are not, on balance, staying on benefits longer than they were a year ago. Weekly claims are volatile and difficult to adjust for seasonal patterns, so the broader trend matters more than any single reading.³

Looking Ahead

1. ISM Manufacturing PMI – Monday, November 2^nd
2. ISM Services PMI – Wednesday, November 4^th
3. Employment Situation – Friday, November 6^th

Why It Matters

The week opens with the ISM manufacturing survey, which registered 54.5% in September and has pointed to growth in factory activity.⁴ Readings above 50 indicate expansion, and the readings on new orders and employment components expected this week will show whether producers are still adding capacity as the fourth quarter gets underway. The ISM services survey follows on Wednesday and covers the far larger share of the economy tied to consumer and business services. That index registered 54.9% in September, while its prices paid measure climbed to 74.0% from 72.6%.⁴ The October report will indicate whether cost pressures are still building. Friday brings the October employment report, the biggest release of the week. In September, payrolls rose by 29,000 and the unemployment rate was 4.2%.⁵ With policymakers holding rates steady last week and describing inflation as still elevated, another modest payroll gain alongside a stable unemployment rate would support the view that hiring is cooling gradually rather than breaking down.

For the period ending 10/30/26.
*Small-cap stocks are represented by the Russell 2000^® Index. International stocks are represented by the MSCI EAFE. Bonds are represented by the Bloomberg US Aggregate Bond Index. Oil is represented by WTI Oil (West Texas Intermediate Oil), a benchmark for light, sweet crude oil and a primary measure for pricing oil contracts and futures in the U.S.

^† Advance estimates use incomplete source data and are subject to revision.

Sources
¹ Federal Reserve Board of Governors, Federal Open Market Committee Statement and Decisions Regarding Monetary Policy Implementation, October 28, 2026
² U.S. Bureau of Economic Analysis, Gross Domestic Product, 3rd Quarter 2026 (Advance Estimate), October 29, 2026
³ U.S. Department of Labor, Employment and Training Administration, Unemployment Insurance Weekly Claims News Release, October 29, 2026
⁴ Institute for Supply Management, Manufacturing ISM Report On Business, October 1, 2026; Services ISM Report On Business, October 5, 2026
⁵ U.S. Bureau of Labor Statistics, The Employment Situation, October 2, 2026

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Comparative Index Descriptions: The Standard & Poor’s (S&P) 500 Index, The Russell 2000^® Index, The NASDAQ Composite Index, The MSCI EAFE Index, Dow Jones Industrial Average^® (Dow Jones or DJIA), The Bloomberg Barclays US Aggregate Bond Index (US Agg Bond), The CBOE Volatility Index (VIX). CSP2026001_44