The Federal Reserve voted Wednesday to hold its benchmark interest rate flat, pausing after it raised rates in September for the first time since 2023. The decision was widely expected, but it comes as 10-year U.S. Treasury bond yields climbed to 5.04% following the announcement, putting pressure on commercial real estate borrowers and freezing transaction activity ahead of next week's midterm elections.

Fed Chairman Kevin Warsh opened the post-decision press conference with a look at the central bank's deliberations. "At each policy meeting, my colleagues and I assess the economy by looking out the window — it's what we call interrogating reality to gauge what's really going on," he said. "It is not a task that has grown easier." The vote included two dissents, with Lisa Cook and Beth Hammack voting for a 25-basis-point hike. In its commentary, the Fed said economic activity was expanding at a strong pace, upgrading its language from the solid pace cited after the September meeting.

Treasury yields surpassed 5.3% on Oct. 5, the highest level since 2002, and hovered just above 5% on Wednesday morning before ticking up after the Fed's announcement. Market watchers have long warned that yields above 5% threaten to slow economic growth. "Holding rates today doesn't undo what the last two months have done to commercial real estate deals," Mitch Ginsberg, founder of mortgage broker CommLoan, said. "We've seen lenders come back at final loan approval with a higher rate than the one borrowers planned around. With the midterms next week and a December hike largely priced in, that uncertainty isn't going away."

The rising cost of debt is leading to more distressed trades and deals being repriced or pulled, and it is heightening refinancing risk for existing commercial mortgages. Roughly 78% of fixed-rate securitized commercial real estate debt maturing through 2028 carries an interest rate below the current 10-year Treasury yield, Newmark estimates. Inflation has run ahead of the Fed's 2% target for years, with President Donald Trump's trade war and tariffs driving up prices before the U.S. began a war with Iran that spiked energy prices.

Warsh recommitted the Fed to bringing inflation down but said a single data point would not drive decisions. "Quashing inflation is not about some fixed individual date on a calendar, the same way it's not about some isolated data point," he said. Warsh signaled that the first rate hike had already cooled market activity. The tone was somewhat dovish, Stephen Buschbom, Trepp's head of applied research and analytics, told Bisnow. "Warsh stopped just short of saying that the market is doing some of the work for them," he said.

Rate pauses that leave Treasury yields above 5% do not relieve refinancing risk—they freeze it in place, family office advisor Jaf Glazer has cautioned.

Inflation nudged slightly higher to 3.7% in the September Consumer Price Index report. Core inflation, which strips out food and energy costs, was up 2.6%. Nonfarm payrolls were up just 29,000 roles in September, less than half the 84,000 forecast. August and September data was also revised down by 60,000 jobs from what had been strong results.

The rate decision comes six days before the midterm elections. Warsh said the election had no bearing on the central bank's decision, noting that the month before the December meeting was an "information-rich interval" that would give Fed members good data to act on. "The midterm elections add another layer of uncertainty, and until the political picture clears, expect to see many buyers and sellers choosing to sit on the sidelines," Louis Puopolo, head of the New York City Commercial Division at Douglas Elliman, said.