Monetary Policy Update: September 2026
During its September meeting, the Federal Reserve raised its overnight policy rate 25 bps (3.75%-4.0%) as widely expected. This was the first change to the overnight rate in 2026 and the first hike since 2023. During the meeting, the Fed provided forward guidance indicating the Committee expects one additional rate hike before the end of the year and no changes in 2027. Currently, the Fed expects to resume rate cuts in 2028. These projections were slightly more dovish than the three rate hikes the market expected heading into the meeting. Of course, this is all based on current facts and circumstances, and subject to change in the months and quarters ahead.
Equity markets held steady immediately following the news release, but sold off sharply on Chairman Warsh’s comment that inflation risk was not improving. The S&P 500 regained some ground and finished the day down 45 bps. Bond yields climbed as the news conference progressed and the 10-year Treasury yield finished the day just above 5% for the second consecutive day.
What led the Fed to reverse its easing cycle?
The Federal Reserve targets Core PCE inflation of 2.0%. Inflation has remained above this target for more than five years and the Committee does not expect inflation to fall near target levels until 2029. Despite signs of easing inflation earlier this year, the combined impact of global tariffs, higher energy prices (a result of constrained shipping routes and energy supply channels) and capital spending from the AI buildout has reignited inflationary pressures in recent months.
Despite recent pressures working against inflation, it is important to highlight that inflation expectations have not deviated far from the Fed’s target (market-based, long-run inflation expectations are currently 2.3%). The Fed’s commitment to maintaining price stability has aided in keeping expectations from drifting higher. If the Fed were to see a significant change in these expectations, additional measures in monetary policy may be necessary. But this does not pose a meaningful risk at this time.
Recent yield curve volatility likely influenced the Fed’s decision to raise rates at its recent meeting. Over a short period of time, the yield curve has shifted from inversion at the short-end of the curve to a normal-shaped yield curve across all tenors. In addition, short and intermediate portions of the curve have risen significantly. While elevated energy prices and inflation were certainly factors impacting yield volatility, concerns over rising U.S. national debt, persistent budget deficits, and the resilience of the U.S. economy and consumer spending were additional factors.
The economy remained strong despite the volatility. What has aided this?
The economy continues to hold up fairly well despite sustained high inflation and geopolitical conflicts. Unemployment levels remain low, labor markets are fairly strong and consumer spending continues to grow (despite elevated energy prices). Current expectations for third-quarter GDP growth is above 2% and the economy is expected to grow at or above long-term trend levels through 2027.
Equity markets have done fairly well amid the aforementioned headwinds as well. Despite more recent declines in equity markets, most areas of the equity market — both domestic and internationally — are up by double digits year to date. Corporate earnings have been extremely strong and contributing to the YTD performance. Much of the growth in corporate earnings has been driven by investments in artificial intelligence (AI) and resilient consumer aggregate demand.
Will exceptional corporate earnings growth continue?
S&P 500 earnings are expected to grow more than 30% in 2026, which is more than three times the long-term annual average. Growth has been broad, with most index constituents beating consensus earnings per share estimates each quarter. This level of growth raises the concern, however, that current levels of earnings growth are not sustainable. There are certainly factors that could pressure earnings growth in the quarters ahead. Higher interest rates, unexpected increases in unemployment and slower consumer spending are factors that could place downward pressure on corporate earnings growth in the quarters ahead. For AI firms, the potential of government regulation serves as an additional risk to future earnings growth.
How should investors respond in the current environment?
While uncertainty remains around the factors contributing to the volatility in energy prices and the yield curve, our message to investors remains consistent: long-term investors should maintain their investment strategy and not panic sell on movements in the market. Use periods of volatility to find tax loss harvest opportunities, add to underweight positions or adjust your asset allocation to better fit your risk tolerance. More specifically, investors that are unwilling to ride through equity market volatility should consider a higher allocation to fixed income.
Consult with your wealth advisor should you have further questions or concerns regarding the recent volatility.
This report and the analysis contained herein were prepared exclusively by the Wealth Management division of Enterprise Bank & Trust and reflect our internal market views.
Investments are: *Not FDIC insured *May lose value *Not financial institution guaranteed *Not a deposit *Not insured by any federal government agency.
