Market Update 9/17/26

• The current environment reinforces the importance of broad diversification and dedicated allocations to asset classes that respond differently across market cycles.
  • While higher interest rates may create near-term price pressure for bonds, higher yields improve forward-looking income and total return, potentially creating a more attractive environment for fixed income investments.
  • Higher interest rates may weigh on Growth stocks, whose valuations tend to be more sensitive to changes in discount rates. This dynamic has been reflected in year-to-date performance, with Value stocks outperforming Growth stocks.
  • Floating rate alternative strategies may benefit from a higher fed funds rate, which may support increased income and total returns.
• The Fed raised interest rates by 0.25%, bringing the fed funds target range to 3.75%–4.00%, as policymakers remain focused on addressing still-elevated inflation.
• Despite ongoing geopolitical uncertainty, the economy remains resilient and supported by solid consumer spending, robust business investment, and a balanced labor market.
• The Fed may be less aggressive than markets anticipated, with its updated projections pointing to one additional 0.25% rate increase through year-end and no additional tightening in 2027.

Fed Raises Rates

The Fed raised interest rates by 0.25% at its September Federal Open Market (FOMC) meeting, bringing the target range for the federal funds rate to 3.75%-4.00%. The decision was unanimous and largely anticipated, with markets assigning approximately a 90% probability of a rate increase ahead of the meeting. The Fed’s relatively succinct statement noted that economic activity continues to expand “at a solid pace” and, despite elevated geopolitical uncertainty, domestic spending has remained resilient, productivity growth is strong, and capital investment remains robust.

Turning to the Fed’s dual mandate, policymakers continue to view the labor market as largely balanced. Inflation, however, remains elevated. With employment conditions providing relatively little cause for concern, the Fed’s focus has increasingly shifted toward getting inflation under control. Accordingly, the Fed raised rates in an effort to support a more timely return to its 2% inflation objective.

Indicates One More Hike, Then Pause

Of particular interest were the Fed’s updated economic projection materials, or “dot plot.” Based on these projections, the Fed now expects one more 0.25% hike through the balance of 2026. Importantly, this is less aggressive than market expectations heading into the meeting, which had been pricing in two to three additional 0.25% hikes this year. The projections also indicate the Fed anticipates holding rates steady through 2027. In contrast, market expectations ahead of today’s announcement had been pricing in approximately four 0.25% interest rate hikes between now and the end of 2027.

Strong Growth, Balanced Labor Market, Elevated Inflation

The Fed revised its 2026 GDP growth forecast higher to 2.3% from 2.2% previously, while lowering its expected year-end unemployment rate to 4.1% from 4.3%. At the same time, expected PCE inflation increased to 3.7% from 3.6%, with core PCE inflation revised to 3.4% from 3.3%. Said another way, the Fed now expects somewhat stronger economic growth and a healthier labor market, but also somewhat higher inflation – a combination that supports a more a restrictive monetary policy stance.

At his subsequent press conference, Fed Chair Warsh highlighted three factors underpinning the decision to raise rates:

1. The economy appears to be strengthening, with a broad range of economic data points showing improvement.
2. Inflation trends have not moderated as quickly as the Fed would like.
3. The impact of geopolitics and the Middle East conflict and associated elevated energy prices appear to be more persistent than previously anticipated.

Warsh also characterized the labor market as balanced, pointing to employment conditions consistent with full employment. At the same time, he emphasized that inflation has remained above target for too long. With the employment side of the Fed’s mandate in relatively good shape, policymakers are increasingly focused on addressing still-elevated inflation. Warsh described today’s action as removing a “dose of accommodation” and indicated that he would be hard-pressed to characterize current financial conditions as restrictive.

Investment Implications

From an investment standpoint, the current environment reinforces why we construct broadly diversified portfolios with dedicated allocations to asset classes that respond differently across market cycles.

• While higher interest rates may create near-term price pressure for bonds, it also provides a more attractive entry point and improved forward-looking yield and total return potential.
• Alternative strategies that have floating-rate characteristics may benefit as higher short-term rates translate into higher coupon income and total returns.
• Continued economic resilience remains supportive for business fundamentals, although we are closely watching the impact of higher borrowing costs.
• Within equities, higher interest rates may create a greater headwind for Growth stocks, whose valuations are generally more sensitive to changes in discount rates, whereas Value stocks may prove more resilient. This dynamic has been reflected in year-to-date performance, with Value stocks outperforming Growth, further reinforcing the importance of maintaining diversified exposure across investment styles and asset classes.

Periods like the current environment highlight the value of maintaining exposure across multiple sources of return rather than positioning portfolios around a single economic or interest-rate outcome. Stocks, fixed income, and alternative assets each respond differently to changes in economic growth, inflation, and interest rates. We believe maintaining broad diversification and remaining disciplined in our approach to portfolio rebalancing leaves portfolios better positioned to navigate an uncertain environment while remaining focused on long-term financial objectives.

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