Interest Rate Movements

The Fed raised the federal funds rate by 25bp, to 3.75%-4.00%, at its September meeting. While this move was widely anticipated, a rising rate environment marks a significant shift from Fed and market projections from last December:

Both the Fed and markets had expected the federal funds rate to fall by 25bp-50bp in 2026, and then ultimately settle in the 3.00%-3.50% in the longer run. In the last 9 months, however, progress against inflation has unfortunately reversed:

Source: Federal Reserve

Core PCE inflation is expected to be about 3.4% in 2026, which would represent an undoing of the modest downward movement of the past 3 years. The Fed is currently projecting 1 more 25bp rate increase in 2026, and perhaps another in 2027:

Source: Federal Reserve

12 out of 18 FOMC participants expect 1 more 25bp rate this year, to 4.00%-4.25%; for 2027, there’s a minor split between those 8 individuals who expect rates to be 4.25%-4.50%, and the 10 who anticipate rates of 4.00%-4.25%, or lower.

Markets, however, are somewhat more pessimistic. CME FedWatch’s market derived numbers suggest that the federal funds rate is most likely to end up at 4.50%-4.75% by the end of next year:

Source: CME FedWatch

AI’s heavy demand for credit, as well as large U.S. fiscal deficits, have helped push long-term Treasury rates higher, with the 10-year rate hovering at about 5% and the 30-year rate over 5%. With shorter-term rates of about 4% as well, the ultra-low interest rates of the 2010s are becoming an increasingly distant memory.

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This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument or investment strategy. This material has been prepared for informational purposes only, and is not intended to be or interpreted as a recommendation. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice.