On September 16th, the Federal Reserve (the Fed) raised interest rates by a quarter point, to a range of 3.75% to 4.00%. It was the first hike since 2023 and every voter agreed. Nobody was hoping to read about a rate hike this year. However, I think it is worth walking through why it happened, because I do not see it as bad news for long-term investors – or necessarily for the economy. Here is where my head is at.

The Fed and Rates

Inflation is the reason. August CPI came in at 3.4% year over year. Back in June the Fed’s own projection for 2026 PCE inflation jumped from 2.7% to 3.6%. That is a long way from 2% – the Fed’s targeted inflation rate. After the meeting, 16 of 18 officials said they expect at least one more hike this year – and four of them see two more. I closely track the probability of rate hikes.

The latest non-farm payroll print (print simply means latest data point) came in much weaker than expected so bond traders backed off from a high probability of two rate hikes this year to just potentially having one hike in December. It’s important to remember the Fed has to balance ‘full employment’ with low inflation – so when employment is soft it causes the Fed to have to be concerned about raising rates because higher rates tends to slow the economy. If jobs are weak and they raise rates, they could ultimately do more damage than good.

August core CPI rose 0.3% month over month (above the 0.2% forecast) and 2.4% year over year. The annual rate eased from 2.5% in July and is the lowest since March 2021. Core is only 0.4% above the Fed’s 2% target. The 3.4% headline gap is mostly energy which I believe doesn’t warrant us for a rate hike.

The part I am watching even more closely is the Treasury market. The 10-year yield went from roughly 4% in February to above 5% in September. On October 1 it touched nearly 5.3%, the highest in more than twenty years. The Fed was sitting still for most of that move, so it was not the Fed raising rates – the market was doing the work for the Federal Reserve.

Some of the reason for the move in the 10-year Treasury is because of inflation and some of it is Washington’s borrowing. Analysts on the street have accurately pointed out that the federal deficit is around 6% with the economy at full employment and that the Treasury’s bond buyback program has not done much to calm the long end. Heavy borrowing by tech companies to fund AI spending is competing for the same buyers too. Remember from your economics class, too much supply can cause prices to fall. With bonds, price falling means interest rates rise. So with the Treasury borrowing at record amounts AND tech companies jumping in and borrowing at record rates, we have lots of debt issuance.

So, the worry that fiscal pressure starts to override monetary policy is a fair one. I do not think we are there yet. A Fed willing to hike while hiring is this soft is the best evidence I have that inflation still sits ahead of the deficit in the pecking order. A hawkish Fed does not fix a deficit, but it keeps the inflation piece of the yield from running away and that is the piece the Fed can actually control. I will keep watching and I think this is the thing most likely to change my mind.

Sticky Inflation, Now With Oil In The Mix

Energy is the part of this I like least, because the Fed cannot do anything about it. The conflict with Iran has been going on since late February, the Strait of Hormuz is still shut (even if oil is getting through it’s not flowing easily and at the same levels as it was in January), and talks to reopen it have stalled. Brent crossed $100 on September 9, settled at $108.75 on September 15 and closed at $102.31 on October 1.

For reference, it averaged $69 last year and in April the World Bank was forecasting an $86 average for 2026. We are well above both.

The IMF has a rule of thumb that I find useful. If oil is up 10% for most of a year, global inflation gets about 0.4 percentage points higher. And it does not stop at the gas pump. European central bankers have already flagged jumps in fertilizer and plastics prices, which eventually show up in grocery bills and packaging. The Fed’s job here is to make sure a one-time energy shock does not turn into everyone expecting higher prices and asking for higher wages.

That is why I think the Fed is being firm about interest rate policy. September CPI comes out on October 14 and it will be the first reading that fully reflects the recent oil spike. I’ll be watching for key components.

What It Does To Borrowing Costs

The Fed moves short term rates, but most of what people borrow against follows longer term yields. The 30-year fixed mortgage was 6.95% on September 17 according to Freddie Mac, which is the highest since January 2025. Prime is now 7.00%, since it sits three points above the top of the Fed range. A few mortgage folks make the point that mortgage rates can actually fall even while the Fed hikes, if the 10 year settles down.

What It Does To Businesses

Anything on floating rate debt feels the hike right away. Everyone else feels it when they refinance. The bar for new projects also goes up when the 10 year is near 5%, so I expect shorter payback requirements and tighter capital plans.

On the other side, companies sitting on cash earn more on it. And I would not forget fuel and freight. For anyone moving goods or people, oil above $100 can hurt margins as much as the interest rate does. You can see this in diesel prices. The trucking industry is in full panic/protect mode right now – and that goes to anyone else who uses diesel in their daily operations.

Services

The services segment is still the majority of our economy, so I wanted to give it its own section. This is my read and not a forecast. Housing related businesses are probably first in line, because buyers are sitting out with mortgages near 7% and August housing starts fell.

Discretionary retail looks stretched. American Eagle dropped 14% in one day after it held its sales forecast and said spending is choppy. Transport and logistics are exposed to fuel. Banks are mixed, since higher long yields help lending margins but loan demand cools, and financial jobs fell by 7,000 in September. Health care is a steady one. It added 17,000 jobs in September and demand there does not care much about rates.

Consumers

Hiring slowed a lot in September. Employers added 29,000 jobs against about 90,000 expected and unemployment ticked up to 4.2%. I would call that a slowdown more than a downturn, since unemployment has stayed between 4.1% and 4.3% since March. The pressure point is pay. Wages are up 3.0% over the past year and CPI is running 3.4%, so the average paycheck is losing a little ground. Savers are on the other side of that. Cash and short-term Treasuries pay meaningfully more than they did a year ago.

Markets

Stocks flinched and then held up better than I expected. The S&P 500 dipped to about 7,519 in futures while Warsh was speaking, then had its best day since August 4 the next day, up 1.1%. It closed at 7,666 on October 1, even with the 10-year spiking that morning. Earnings growth tied to AI spending is doing most of the heavy lifting. The weak jobs report also helped, because it cut the odds of an October hike. After the report, futures put the chance of a hold at about 77%.

My own bias in a 4% to 5% rate world is toward quality. Strong balance sheets, pricing power, and earnings that do not depend on cheap credit. On bonds, I think a 5% 10 year pays you to wait, which is not something I could say for a long time. I would just be patient about adding and not try to catch the exact top in yields.

Disclaimer

Portus Wealth Advisors, LLC (“Portus”) is a registered investment adviser with the U.S. Securities and Exchange Commission (“SEC”). Registration with the SEC does not imply a certain level of skill or training and does not constitute endorsement by the SEC.

The information contained in this communication is for informational purposes only, is general in nature, and is not directed to any specific individual. It does not constitute investment advice, a recommendation, or an offer to buy or sell any security. Reading this communication does not create an advisory relationship with Portus.

The views and opinions expressed herein are those of Portus as of the date of publication and are subject to change without notice. Portus makes no representation that any opinion or projection will be realized. Information has been obtained from sources believed to be reliable; however, Portus does not warrant its accuracy, completeness, or timeliness.

Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific strategy will be profitable or suitable for an investor’s individual circumstances. Investors should consult their own tax, legal, and financial professionals before making investment decisions.