Federal Reserve holds rates as Warsh declines to promise December hike

What did the Fed decide on Wednesday?

The Federal Reserve left its benchmark interest rate unchanged on Wednesday. Some policymakers dissented and voted to raise it instead. Chair Kevin Warsh would not say whether a hike may come in December.

Why it matters: Stocks rose modestly on the day. The S&P 500, the index of large U.S. companies that many 401(k) funds track, rose 0.3%. The Nasdaq-100 gained 0.5%, and the Dow edged up 0.2%.

Why did Warsh stop short of a December hike?

Warsh said financial and credit conditions have tightened since the Fed's September meeting. Bond yields have climbed. A yield is a bond's yearly interest as a share of its price. Credit spreads have also risen. A spread is the extra yield a riskier borrower pays above what the government pays.

In his view, those tighter conditions are already doing some of what a rate hike would do. Higher borrowing costs across the market can slow spending and lending without a move from the Fed.

He also said he generally avoids hinting at future rate moves unless circumstances are urgent. Hinting at future moves this way is known as forward guidance.

How did Treasury yields and bond markets react?

Longer-term yields rose, but short-term yields fell. When bond prices fall, yields rise.

The 10-year Treasury yield, the rate the government pays to borrow for a decade, rose 6 basis points to 5.05%. The 30-year yield rose 7 basis points to 5.37%.

At the short end, the 2-year yield fell 3 basis points to 4.67%. The 3-month Treasury bill yield fell 4 basis points to 4.18%. Short-term yields tend to track expectations for the Fed's own rate, so the decline may reflect fewer bets on a near-term hike.

The iShares iBoxx $ High Yield Corporate Bond ETF (NYSE Arca: HYG) is a fund of riskier company bonds that trades on an exchange like a stock. It sits 4.4% below its 52-week high, its highest price over the past year.

What could bring a December hike back into play?

Warsh's case rests on conditions staying tight. If yields and spreads ease, that restraint could fade, and the argument for a hike might return.

The dissenting officials voted for a hike now. Their votes show that not every policymaker shares the chair's view that markets are doing enough.

What could happen next for interest rates?

What’s next: The September report on personal income and spending is due Thursday, Oct. 29, at 8:30 a.m. ET. It includes the PCE price index, the inflation gauge the Fed watches. The advance estimate of third-quarter GDP arrives at the same time.

The Employment Cost Index follows on Oct. 30. The October jobs report is due Nov. 6, and the October consumer price index on Nov. 10. Officials meet again in December.