Market Update 14th September 2026

The great rate debate

The Federal Reserve is due to meet this week, and despite pressure from various politically interested parties, not least the President, it appears likely that the base rate will move up. Markets are now pricing in a greater than 80% chance of a hike to the 3.75-4.00% range, ie a 25 bps increase from the current 3.50-3.75% range. At the start of the year, expectations for the September meeting were that the Fed rate would be somewhere around the 3.00- 3.25% range, with the bookies’ current favourite of 3.75-4.00% given a 0% likelihood.

So, what has changed?

When thinking about why rates are where they are, it is always worth thinking about what monetary policy is designed to do in the first place. The Fed targets setting rates to achieve maximum employment, as well as manageable and stable average price increases of around 2% over the long run. So it’s about employment or inflation. In this case, both are relevant, but the latter particularly so.

The most recent US jobs report was far more positive than had been expected. That’s clearly good news for the economy, but the Fed may want to nudge rates up in order to smooth out the ups and downs in the job market, and its knock-on effect on inflation.

Which brings us on to the main issue. Inflation started the year at 2.4% and is now well over 3%. The obvious reason for that is the inflationary impact of the Iran war. Petrol prices have gone up by around 25%. However, to focus on fuel is to miss the point. While increased fuel prices have certainly stung the consumer, gas, electricity and petrol combined only have a single figure percentage weighting in the inflation calculations. And making a call on oil prices is notoriously difficult. You’re basically trying to predict what will happen next in Iran, which is quite the challenge given the character of the main protagonists.

By far the biggest single factor in the inflated inflation figure the Fed is trying to address is housing, with a weighting of around one third of the total. And this is where the intrigue lies.

There is a paradox in play. Increases in interest rates have a unique effect on the housing market. When borrowing costs rise, mortgage costs follow suit and landlords will often act to pass rental increases on to tenants. This is an inflationary force. The longer term effect is to take steam out of the housing market, and one would expect prices to come down as property becomes a relatively less attractive asset. That’s a deflationary impact.

Knowing exactly when the short-term becomes the long term is challenging, especially as the effects of the last rate cycle have probably not played out in full. After 2022 and 2023’s hikes, 2024 and 2025 were years of steady cuts. If there is a resumption in hikes in a few days, the blurred impact of short, medium and long-term effects becomes even more confusing.

This, combined with the aforementioned volatility at the relevant political top tables, means we are in a very unstable and unpredictable macro environment. Even when policymakers try one thing, the net effect is often the opposite. For example, what appears to be some ill-advised intervention in the bond markets from the US treasury seems to have shined a light on a problem, rather than help solve it. Rates have continued to snake up, and now at multi-year highs on both sides of the Atlantic.

While not wanting to align with the Michael Gove ‘we’ve had enough of experts’ view, I would not be surprised if current projections around various macro variables end up as being about as much use as those that have preceded them. I appreciate there is an irony here. I am making a prediction about predictions in order to say we shouldn’t focus too much on predictions!

But anyway, you get the point. And even if one gets the big macro calls right, the coincident impact on asset prices may not follow logical suit. The more pins you stack up in your projections, the harder it is to knock them all down.

For example, anyone who correctly predicted that interest rate discussions would turn from the pace of cuts to the pace of hikes would perhaps have concluded that equity market would be jolted. That hasn’t been the case. This is because earnings growth has more than offset the headwind of a higher discount rate.

The Fed’s decision will inevitably get a lot of attention. However, we think it is important not to overlook the strength of recent corporate results, and expectations are for more strong growth through the remainder of the year. With solid recent momentum from almost all sectors, this is one projection that isn’t relying on blue-sky thinking.

George Salmon – Senior Research Analyst

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