Fed raises interest rates to 3.75%-4.00% in first inflation.
During his third post-meeting press conference as Fed Chair, Kevin Warsh reaffirmed his commitment to bringing <a s credibility. Furthermore, he has expressed reservations regarding forward guidance, citing the risk that it may lock policymakers into specific paths despite shifting economic data, and he has launched task forces to review Fed practices concerning data, communication, and balance sheet management.
Warsh reiterated these priorities during his September 16 press conference, stressing the necessity of returning inflation to the 2% level. In recent public remarks, he noted the broad nature of current inflation, stating, “too many categories are still posting increases above 3%.” He also opted not to provide responses for the Fed’s Summary of Economic Projections, characterizing the practice as a form of forward guidance. Updated median projections from the Fed—excluding Warsh—point to one more rate hike this year, slightly more optimistic growth forecasts for 2027, and stable inflation expectations for next year compared to June estimates, though there is a slight increase in inflation projections for 2028. While the official policy statement remained largely consistent with the previous meeting, it included new language noting that “domestic spending remained resilient.”
While interest rate hikes throughout 2022 and 2023 were effective in tempering inflation over the last four years, climbing oil prices are once again pushing up near-term costs. The Core Personal Consumption Expenditures (PCE) Price Index rose from 3.0% in December 2025 to 3.3% in July 2026. Front-month futures for West Texas Intermediate crude oil climbed from approximately $57 per barrel at the start of the year to a high of $113 in April. After a period of decline, prices have recently moved back above $100. These elevated energy costs have served as the primary catalyst for increased rate hike expectations and higher Treasury bond yields. Longer-term inflation expectations remain stable, as investors believe the Fed’s rate increases will eventually bring inflation under control.
Federal Reserve balance sheet and market liquidity
In December 2025, the Fed ceased the reduction of its bond holdings and began purchasing short-term Treasury bills to ensure sufficient reserves within the banking system and to keep short-term rates aligned with its policy target. Currently, the Fed’s bond portfolio is approximately $6.6 trillion, down from a peak of nearly $9 trillion in 2022. The Fed scaled back its regular purchases this year, and the balance sheet has seen minimal growth since Warsh took office. By purchasing Treasury bills to expand the balance sheet, the Fed can bolster market liquidity by absorbing some of the additional supply. Liquidity—the capital available for purchasing goods, services, and financial assets—also helps protect markets from unexpected shocks, and current liquidity levels remain stable. Warsh has voiced doubts regarding the long-term effectiveness of this approach and its suitability as a policy tool, having established a task force to investigate the matter further.
Two-year Treasury yields climbed 0.08% to 4.74% today as the outlook for further rate hikes solidified. Ten-year Treasury yields increased 0.02% to 5.02% compared to the previous day’s close. Both large-cap stocks, tracked by the S&P 500, and small-cap stocks, tracked by the Russell 2000, saw a decline of 0.5%.
While global central banks generally eased policy throughout 2025, many have begun raising rates this year to combat rising energy costs. Both the European Central Bank and the Bank of Japan implemented rate hikes in 2026, with further increases expected. Investors are also bracing for potential rate moves from the Bank of England and the Bank of Canada later this year.
Maintaining a constructive outlook amid market uncertainty
We maintain a positive outlook for diversified portfolios and identify potential in growth-focused areas, such as U.S. equities, global infrastructure, and structured credit. Although rising energy prices pose a risk to inflation and could potentially slow economic activity, corporate earnings and consumer spending remain strong, bolstered by fiscal measures like reduced corporate and individual taxes and recent tariff rebates. Maintaining a diversified portfolio across various asset classes can help mitigate the impact of volatility on individual holdings. We will continue to provide updates as new information becomes available and as we refine our market assessments.
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Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index and is representative of the U.S. small capitalization securities market. The Personal Consumption Expenditures (PCE) Price Index is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. It is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
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Analysis: Assessing inflation’s impact
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