Fed Holds Rates at 3.75% to 4% in Split Vote as Cloud Results Diverge

Key Facts

The Federal Reserve kept its target range for the federal funds rate at 3.75% to 4% in its decision on October 28, 2026, with the Federal Open Market Committee voting 10 to 2. The hold came as officials assessed persistently elevated inflation alongside economic activity expanding at a solid pace, while markets focused on growth and price data due the following day. The committee’s statement said that accumulating more information would help it determine the appropriate policy stance to ensure inflation returns to its 2% goal in a timely manner. The vote showed a split within the committee over the next move, with Lisa Cook and Beth Hammack preferring to raise the target range by a quarter of a percentage point. That puts the decision to hold rates in the context of an open debate over inflation risks, rather than a consensus that price pressures have eased.

The statement said economic activity was expanding solidly while inflation remained elevated, a balance Charlie Wise, head of global research at TransUnion, described as a continuation of the trade-off between inflation concerns and an economy and labor market that had remained relatively resilient. The next inflation reading carries particular weight because September personal consumption expenditures data, the Fed’s preferred inflation measure, were due the day after the decision. The market forecast for the September core personal consumption expenditures index was a 0.3% monthly increase, after a previous reading of 0.2% in August. The market estimate for third-quarter GDP growth was 3.2% annualized, compared with a previous reading of 2.2%. These are forecasts made before the data release, not actual results for the third quarter or September.

In technology company results, Microsoft reported revenue of $92.3 billion in the first quarter of its fiscal 2027, up 19% year over year, and GAAP diluted earnings per share of $4.92. Total Microsoft Cloud revenue was $63.9 billion, up 30% year over year, while Azure revenue rose 48%. Azure posted quarterly revenue of $33.17 billion, beating Visible Alpha’s estimate of $32.84 billion; its revenue in the previous quarter was $29.4 billion. After the results, Microsoft shares rose about 6% in extended trading, in response to cloud performance that exceeded estimates. The stock closed at $527.35999 on October 28, according to EL7 data.

At Alphabet, Google Cloud generated revenue of $30.71 billion in the third quarter, beating the average analyst estimate of $29.57 billion, which had implied year-over-year growth of 95.1%. CEO Sundar Pichai said Cloud revenue growth was driven by “tremendous demand for our AI infrastructure and solutions,” adding that demand for TPU systems was strong across a broad range of customers. By contrast, Google Search & other revenue was about $63.35 billion, below Newsquawk’s estimate of $64.85 billion, while YouTube advertising generated about $11.21 billion against an estimate of $11.43 billion. Year over year, search revenue rose from $56.567 billion to $63.350 billion, and YouTube advertising revenue increased from $10.261 billion to $11.207 billion. Google Services revenue rose 11% to $96.3 billion, with search growing 12%; the company said the annual growth rate in search queries was the highest in five years.

Google Cloud’s outperformance did not dispel investor concerns about Alphabet’s earnings and cash. Net income available to common shareholders was $26.170 billion in the third quarter, compared with $34.979 billion in the same period of 2025, and diluted earnings per share fell to $2.12 from $2.87. Earnings per share came in below the analyst consensus of $3.02, despite revenue growth of 25% to $127.6 billion, slightly above the estimate of $127.22 billion. The company also posted negative free cash flow of $9.07 billion, compared with analysts’ estimate of a $36 million outflow; Reuters attributed this to spending to expand cloud business capacity. Alphabet shares fell 6.5% during Wednesday’s session and dropped more than 6% in extended trading after the results, while closing at $324.86 on October 28, according to EL7 data.

Investors’ focus on returns from AI spending follows divergent share performance since the previous quarter’s results. Alphabet shares have fallen about 5% since its July 22 results, while Microsoft shares have risen 36% since its July 29 report, which showed Microsoft Cloud growth at its fastest pace in four years. On broader spending, Reuters forecast that Alphabet, Microsoft, Amazon and Meta would spend more than $700 billion combined during 2026 to expand AI data centers and secure the chips and power required. These investments put cloud unit performance and cash flows at the center of the market’s assessment of results from major technology companies. After the Fed decision, the Nasdaq and S&P 500 indexes rose 0.2% after the press conference began, and the dollar index fell 0.2%. In the Treasury market, the two-year yield fell 3.8 basis points, while the 10-year yield rose 5 basis points.

The advance estimate of third-quarter GDP and September personal income and spending data were scheduled for release on October 29 at 8:30 a.m. Eastern Time. The income and spending data include the personal consumption expenditures index, including the core measure the committee tracks in assessing inflation. The agenda brings together the awaited actual growth reading and the price index, after a decision that left rates unchanged and showed that two members preferred a hike. The market estimate for annualized growth in the third quarter was 3.2%, while the forecast for the core index’s monthly increase was 0.3% in September. Those figures remain pre-release forecasts, with the scheduled publication the next event for investors after the decision.