At its meeting on Wednesday, Oct. 28, the Federal Reserve kept the target rate at 3.75% to 4%, even as inflation proves stubborn. That pause might sound like a snooze, but the ripple effects are anything but boring. Between the last two meetings, the yield on the 10-year Treasury note climbed to 5.36%, a level not seen in nearly 20 years, before retracing to around 5%. Meanwhile, the dollar has rallied sharply.
Americans now face two realities. Global investors and energy prices are keeping borrowing costs painfully high, but cash holders are finally being paid for it.
7% Mortgages and the Saver's Silver Lining
"A bank effectively 'rents' money from depositors, then lends those deposits back out at a higher rate to earn a spread," Battle Bank noted in its recent bulletin. Loan rates, especially on mortgages, track the bond market fairly closely, often moving first, while deposit rates typically follow with a lag.
Borrowers are feeling it. The average 30-year fixed mortgage rate rose to 7.49% earlier this month, the highest since 2023, according to Bloomberg. It was below 6% as recently as late February. Credit card rates remain stuck in the high teens and 20s.
Rates are "higher for longer and could rise further," said Mark Hamrick, founder of The Hamrick Brief. He added that many households haven't gotten the inflation relief they hoped for and have been borrowing more to cover the gap.
Savers are on the other side of that trade. After 15 to 20 years of near-zero returns, money market accounts and certificates of deposit pay meaningfully more. In a 60/40 retirement portfolio, the bond portion is "generating real income instead of acting as mere ballast," the bulletin said. Buyers with cash reserves may also face less competition if higher rates cool the housing market.
The Washington Standoff and the Geopolitical Fuel Behind the Dollar
Cutting rates isn't easy. Fed Chair Kevin Warsh, who replaced Jerome Powell in late May, is trying to bring down inflation and protect the dollar's value. The stance has led to a standoff with Treasury Secretary Scott Bessent, who wants to keep the government's own borrowing costs low, according to the bulletin.
According to former Goldman Sachs Chief FX Strategist Robin J. Brooks, the Fed isn't what's driving the dollar. "The Dollar isn't strong because of the Fed or France — it's strong because of oil," he wrote.
The latest rally started on Sept. 10, when the Saudi East-West pipeline was attacked. Since then, front-month Brent crude has risen from $100 to around $115. Brooks argues that at these levels, oil prices reflect a supply shortfall worse than at the height of the fighting with Iran in March and April. He calls that risk premium "excessive," warning about the setup fragility once the conflict disappears. "As soon as the war ends — and of course it will — then oil prices will tumble, and the Dollar will fall substantially," Brooks wrote.
If that scenario happens, a sliding greenback would make U.S. bonds less attractive to foreign buyers and make it harder for the Fed to cut rates—forcing the Treasury to finance America's huge debt load at even higher yields. Nearly 4 of every 10 tax dollars already go toward interest on that debt, according to Battle Bank.
