|
What does the first Fed rate hike in three years mean for investors? At its September meeting, the Fed unanimously decided to raise its benchmark interest rate by 0.25%, to a range of 3.75% to 4.0%. This is the first rate increase since 2023 and is in response to higher inflation, primarily due to oil prices. This is important because monetary policy can affect consumer spending, business investment, and financial markets. Here are some key points to keep in mind: • The Fed’s decision to raise rates is meant to help control inflation. At his press conference following the rate decision, Fed Chair Kevin Warsh focused on inflation that has been stubbornly higher than the official 2% target. Specifically, he stated that “today’s policy action will support a timelier return to the committee’s 2% goal.” The most recent Consumer Price Index report, for instance, showed that prices rose 3.4% year-over-year in August, driven largely by energy prices that are up 16.3%. • This rate hike was largely anticipated by markets. Long-term interest rates have hovered near multi-decade highs and the implied probability of a rate hike was over 90% according to the federal funds futures market. Current expectations are for another rate hike in December. • The Fed also published its new Summary of Economic Projections. Warsh did not submit projections, the same as in June. Regardless, the report shows that other FOMC members expect one additional rate hike this year, and perhaps most importantly, that rates may not fall again until 2028. While these projections provide a glimpse into how policymakers view the current environment, they can change from meeting to meeting. • When it comes to investing, it matters why the Fed is raising rates. In 2022, for instance, the Fed was seen as being too slow to react to rapidly rising inflation, so swift rate hikes were negative for markets. Today, higher inflation is typically viewed as the result of higher oil prices which will eventually be resolved. This is one reason markets have not reacted as dramatically this cycle. • Although rate hikes are often viewed as slowing the economy and being negative for markets, this is not always the case. For example, if slightly higher policy rates help to stem inflation while ensuring that underlying growth continues, this can be positive for both stocks and bonds. In the long run, what drives interest rates and Fed decisions are factors such as economic growth and productivity. Questions around artificial intelligence and the labor market will likely play a larger role than short-term oil prices when it comes to where rate policy goes in the next few years. The included chart shows the history of Fed rate hike cycles, which helps illustrate how these policy moves have played out across different economic environments and why context matters so much. Staying focused on your long-term financial goals and maintaining a diversified portfolio remains the most reliable path through periods of changing interest rates.
|
|
Why are oil prices back above $100? Oil prices are a key economic indicator, and when they rise sharply, it can affect everything from consumer spending to corporate profits and inflation. Here are some of the key geopolitical factors at play: • The main story is still that the Strait of Hormuz, through which roughly one-third of global oil shipments normally pass, has been effectively closed since the U.S.-Iran conflict began in late February. In addition, Iran-backed Houthi forces out of Yemen have threatened another major waterway, the Bab al-Mandeb Strait, out of the Red Sea. • More recently, Saudi Arabia’s East-West Pipeline was attacked by Iranian drones, forcing a precautionary closure. The pipeline carries up to 7 million barrels per day, and repairs to pumping stations have been estimated to take weeks, although U.S. and Saudi officials are hoping it could be back up and running in days. • The IEA estimates global oil production fell by 1.6 million barrels per day in August, with over 10 million barrels per day of Gulf production shut down, according to a recent report. The U.S. continues to be an important producer of oil, which has helped to stabilize prices relative to past episodes. However, the U.S. is not completely insulated since it still imports crude oil for different purposes. • These geopolitical events have made oil extremely volatile this year. Still, oil prices did improve for a period even as regional conflicts raged on. For instance, prices fell to around $70 per barrel in July even as the war was continuing. So, it’s important to maintain a longer-term perspective when it comes to oil price moves. • For consumers, higher oil prices have continued to raise inflation risks. The latest Consumer Price Index report for August showed that consumer energy costs rose 16.3% over the past year, with much of this driven by gasoline prices rising 27.4%. One measure of “super core” inflation, which excludes food, energy, and shelter, rose only 2% year-over-year. This means that underlying inflation is still steady, while headline inflation is largely driven by energy costs. The chart included shows the historical relationship between oil prices and the broader stock market, which helps illustrate how significant supply disruptions can ripple through the economy and financial markets. While geopolitical events like this can create short-term volatility, history shows that markets and economies tend to adapt over time.
|
|
How does the failed Clarity Act affect cryptocurrencies and portfolios? Whether digital assets are a true asset class is still the subject of debate in the investment industry. Regulatory clarity has long been seen as a key factor in the adoption of cryptocurrencies, particularly by institutional investors. Here are some relevant facts to keep in mind: • The Senate recently rejected the Clarity Act in a 49-50 vote. The legislation’s goal was to establish a federal regulatory framework for digital assets, and would have divided oversight of digital assets between the CFTC and SEC. Recent events mean that a comprehensive framework is unlikely before the midterm elections, leaving uncertainty in place for the broader digital asset market. • Congress previously passed the GENIUS Act in a 68-30 bipartisan vote in June 2025, which created a framework specifically for stablecoins. Stablecoins are digital currencies tied to the U.S. dollar and are generally seen as more stable than cryptocurrencies like Bitcoin, by design. While adoption of cryptocurrencies for payments across the economy has been slower than many had predicted, stablecoins have different use cases. • Bitcoin and other cryptocurrencies have been highly volatile over the past year, experiencing what some refer to as another “crypto winter.” After peaking above $125,000, Bitcoin then fell as low as $58,000 before rebounding somewhat more recently. Historically, it’s not unusual for cryptocurrencies to be several times more volatile than the stock market. During the 2022 bear market, for instance, Bitcoin fell over 75% while the S&P 500 declined roughly 25%. • Some investors are drawn to Bitcoin and other cryptocurrencies exactly due to this volatility, especially in periods when prices are rising rapidly. Understanding that volatility goes both ways, and possibly for long periods of time, is an important investment lesson. For example, while Bitcoin has surpassed the S&P 500 over some short periods, the broader market has outperformed over longer periods, such as from 2018 to today. • This also illustrates how crypto can amplify risk rather than reduce it in a portfolio. The idea that cryptocurrencies are defensive assets that are uncorrelated with the traditional financial system has not played out as some had hoped. This is why, for those interested in cryptocurrencies, it’s important to view them from a portfolio perspective and focus on how they interact with other assets. The included chart on cryptocurrencies provides helpful context on their price history and volatility, showing how dramatic the swings in digital asset prices can be over time. Ultimately, while regulatory developments around cryptocurrencies will continue, the most important factor for long-term investors is staying focused on a well-balanced portfolio that aligns with their individual financial goals rather than reacting to news-driven price swings.
|
|
Why are global bond yields soaring? Bond yields measure the return investors earn for lending money to governments or companies, and when yields rise, existing bond prices fall. Many factors can affect bond yields, so here is what to know about recent moves: • Interest rates have risen in general this year not only because of inflation, but due to positive growth trends and spending in areas like AI. This is why yields have risen even as the stock market has reached new all-time highs. This is in contrast to periods like 2022 when inflation caused rates to rise and the stock market to fall. Today, the 10-year Treasury yield is hovering near 5% while the 30-year is around 5.3%. • Concerns about government debt levels are weighing on bond markets. The U.S. national debt has exceeded $40 trillion for the first time, with an annual deficit projected to reach $2.1 trillion. Heavily indebted countries, including Japan and across Europe, have seen the sharpest yield increases. The U.S. Treasury Department has also helped to intervene in global bond and currency markets, including supporting Japan’s bonds, in order to maintain a ceiling on Treasury yields. • Global central banks are expected to raise rates. In the U.S., the Fed raised rates by 0.25% at its September meeting due to persistent inflation running above the Fed’s 2% target. Other central banks are expected to continue raising rates as well due to high oil prices. • A surge in corporate bond issuance is absorbing liquidity and demand for bonds, with issuance tied to artificial intelligence investment. Recent data from the Census Bureau shows that data center construction spending reached an annualized $75 billion in July. All of this competes with government bonds for investor demand. • Most recently, bonds are also reacting to the ongoing conflict in Iran and the broader Middle East, which further affects oil prices. Brent crude and WTI have jumped back above $100 per barrel recently, which raises more questions about consumer prices in the coming months. • Rising yields put downward pressure on bond prices. The Bloomberg U.S. Aggregate Index, a measure of the overall bond market, is now flat-to-negative on the year. At the same time, higher yields are positive for investors seeking income from their portfolios. The included chart shows the level of U.S. Treasury yields, which are near multi-decade highs. While rising yields can raise concerns, keeping a long-term perspective and maintaining a balanced portfolio is still the best way to navigate these market conditions.
|
