Clients and regular readers will note that as recently as, say, a month (or less) ago, I was firmly of the mind that the Fed would not hike rates anytime soon... A view that markets demanded that I reconsider just ahead of this week's Fed meeting.
Here's from my commentary on Tuesday, where I referenced my commentary from the previous Friday:
"From last Friday's note:
"...this is the environment where a hike actually could lead to lower 10 and 30-year yields... If that's the case the Fed may be comfortable hiking next week, which may have me sympathizing with the consensus after all... Although there's still the mid-term election and federal debt issues I mentioned yesterday for the Fed to contend with."Suffice to say that a hike is what's needed to bring down longer-term rates has become the consensus view... But only if it's followed by a statement and/or press conference that implies there'll be zero hesitation to hike again should conditions dictate... I.e., the language has to be sufficiently hawkish."
In a nutshell, with the market pricing in a 92% probability of a rate hike, there was simply no way the Fed could risk not delivering.
So why then did markets swoon heading into, and on the day of, the Fed's decision to hike?
Also from Tuesday's note:
"So you might be wondering, if the market is demanding it, and it looks like the Fed will deliver it (although, if there were ever a time when the Fed might balk at market "forces" it's now), why are stocks having a rough go if it to start the week?
Well, that's likely more about the Iran situation... Trading yesterday was yoyo-ing along with social media posts suggesting Iran is "desperate for a deal," which they in short-order denied... Regardless, it, and other recent developments, suggest a willingness to get back to the table."
Note that when the dust settled the day after Fed day, stocks saw quite the snapback rally -- only to resume their choppiness come Friday.
S&P 500 futures Wednesday - Friday:
So, now that the Fed's out of the way for the next month, here's some of what we're eyeballing in the very near-term:
- With mid-terms approaching there's strong incentive for the administration to juice markets.. How might they do that?
- Perhaps more-so than anything else, it would be to make progress on the Iranian front... Ironically, here are this morning's headlines from that source:
- "Iran's top security official: talks continue with mediators Qatar and Pakistan, conditions for negotiations conveyed - Al Jazeera interview"
- "Iran’s top security official: Tehran wants war between Saudi Arabia and Yemen to end - Al Jazeera interview"
- "Iran’s top security official: Qatar has relayed Tehran’s terms to Washington to end war, awaiting Trump’s response – Al Jazeera interview"
- Scott Bessent meeting tomorrow with China's vice premier He Lifeng:
- It would be very good timing to announce something US/China-friendly right here.
- Upcoming data referenced in the last section of our weekly wrap below.
As for the longer-term, which, frankly, is what actually matters, nothing's occurred of late that would alter our overall structural view.
Which is:
US government debt is roughly 120% of the economy, the annual deficit is running near 6%, and neither party is proposing to fix it. That isn't a forecast -- it's arithmetic, and it shapes everything downstream. There are only a few ways out of a debt load that size, and the politically realistic one is to let inflation run a little warm while holding short-term interest rates down. The debt then shrinks relative to a growing economy. This isn't new -- it's roughly what the U.S. did from 1942 to 1951 to work off wartime debt. That implies a higher floor under inflation than we grew used to in the 2010s. Not a crisis, not a return to 2022 -- just a persistent low hum rather than the near-zero backdrop of the past decade. Labor has more bargaining power than it did, and the political incentives point the same direction. The Fed has less independence than its language suggests. Warsh is operating with real political constraints, and we read the bias as easier-than-stated regardless of how hawkish the rhetoric sounds. Where we expect the strain to show is in longer-term interest rates. Short rates get held down; longer-dated borrowing costs drift higher... Although that drift will not happen in a straight line -- in fact we see potential opportunity to bet on a cyclical decline in long-end yields approaching. The dollar we believe is on a slow structural decline, though we're not pressing that view at the moment. It's the reason we own more outside the U.S. than a domestic-only portfolio would. And we think the Japanese yen is early in a multi-year recovery, as Japan's central bank slowly normalizes policy and Japanese institutions bring capital home.
Here's the summary of this week's scoring of our PWA Index, followed by your weekly macro roundup*... The "week in brief" section for those of you who prefer just the highlights (although I highly recommend you give the whole thing a shot -- too much in my view gets unsaid in the summary):
The Fed Can't Print Oil*
Week of September 14, 2026
The Federal Reserve raised interest rates on Wednesday for the first time in three years. It did so unanimously, into an energy supply shock it can do nothing about, six weeks before a midterm election. That combination is worth sitting with, because it says something about the position the central bank is in.
The week in brief
- The Federal Reserve raised rates to a target range of 3.75%–4.00%. The vote was 12–0. Sixteen of eighteen officials expect at least one more increase before year-end.
- Long-term rates fell on the week while short-term rates rose, and the market's priced expectation of inflation dropped at every horizon. That is not the usual response to a rate increase.
- The 10-year Treasury yield briefly touched 5% — its first time there since 2007.
- Mortgage rates jumped 19 basis points to 6.95% — in a week when the 10-year Treasury rose two basis points and the 30-year fell. That relationship normally holds tightly, and it did not this week. Builder confidence fell to a one-year low.
- Households spent anyway. August retail sales rose 1.2% against expectations of 0.8%, with the core measure posting its strongest month in two years even after inflation.
- Diesel hit a record $6.29 a gallon, 68% above a year ago.
- The Bank of Japan raised rates to their highest since 1995, and the yen weakened anyway.
- Our internal conditions gauge rose to +5.97 from +4.48, better than roughly 94% of the past four years.
- What matters next: a large cluster of inflation and household-spending data on Wednesday, September 30, and the next Federal Reserve decision on October 28.
What a rate hike can and cannot fix
The Federal Reserve is tightening into an energy shock. Oil is near $100 on conflict in the Persian Gulf, a Saudi pipeline carrying seven million barrels a day was shut by a drone strike on Sunday, and diesel set a record this week.
Higher interest rates do nothing about any of that. The Fed cannot print oil and it cannot print oats. What it can do is restrain demand — which means the households already struggling to fill a gas tank and a grocery cart are the ones who absorb the policy. That is an uncomfortable trade in any environment and a particularly awkward one now.
So why do it? By Wednesday morning the market had priced an increase at roughly ninety percent and had made fairly clear that not delivering one would be taken badly. When an action is that close to forced, it tells you less about the institution's intentions than it appears to. A central bank determined to tighten and one buying credibility it intends to spend later both raise rates in that situation.
The question that matters is not whether they hiked. It is whether this becomes a durable tightening cycle. We are skeptical, for a structural reason that has nothing to do with this meeting.
The federal government is running a deficit near 6% of the economy against an enormous volume of debt coming due, and it is increasingly financing that debt at the short end of the curve — issuing short-term bills rather than long-term bonds. That means every additional rate increase raises the government's own interest bill faster than it used to. The arithmetic gets harder the longer the Fed tightens, which makes a long campaign difficult to sustain regardless of intentions.
Two things would end it quickly: a meaningful break in the stock market, which would rally bonds and force a fast reversal, or a resolution in the Strait of Hormuz, which would send oil sharply lower and take the inflation pressure off directly. Neither is far-fetched.
The unusual thing the bond market did
Normally a rate increase pushes yields up across the curve. This week the opposite happened at the long end: the 30-year Treasury yield fell while short-term yields rose, and the market's priced expectation of inflation fell at two years, five years and ten years.
That is what a market does when it decides a central bank is serious about the job.
It bears on a question we have been working through for weeks. There are two competing explanations for why long-term rates have been high, and they point to different futures. One is that investors demand more compensation to fund a growing volume of government borrowing. The other is that they have doubted the Fed's willingness to contain inflation.
This week leaned toward the second. But one week is one week, and both forces are operating at once. The borrowing problem does not disappear because the bond market had a good five sessions, and we would rather tell you the evidence tilted than announce a resolution.
Your mortgage rate, and a relationship that just broke
All year we have made the point that mortgage rates are set by the 10-year Treasury rather than by the Federal Reserve. This week that relationship came apart, and the way it came apart is worth watching.
The Federal Reserve raised its policy rate on Wednesday. Over the week as a whole, the 10-year Treasury yield rose about two basis points and the 30-year actually fell. On the usual relationship, mortgage rates should have gone roughly nowhere.
Instead the average 30-year fixed mortgage went to 6.95% from 6.76% — up 19 basis points, the fourth consecutive weekly increase, the highest since January 2025, and the biggest one-week move in roughly 16 months. Mortgage applications fell 4.1%, with purchase activity 19% below a year ago. Builder confidence fell to a one-year low, with two-thirds of builders now using incentives to close sales and 38% cutting prices outright.
So mortgage borrowers paid an extra 19 basis points in a week when the government's own long-term borrowing cost went down. There are two plausible explanations and they lead to different places.
The first is a timing artifact. The weekly mortgage survey averages quotes gathered from the previous Thursday through Wednesday, so it largely captures the run-up into the Fed meeting — when the 10-year was pushing 5% — and mostly misses the bond rally that followed on Thursday. If that is all this is, next week's reading falls back.
The second is that the gap between mortgage rates and Treasury yields is genuinely widening, because the investors who fund mortgages are demanding more compensation for uncertainty about where rates go from here. That would be the more consequential outcome, because it means housing gets tighter even in scenarios where Treasury yields fall.
We will know which within a week. If the mortgage average drops back toward the Treasury move, it was timing. If it holds near 7%, the spread has widened and housing has a new problem that does not go away when the bond market calms down.
Either way, housing remains the one part of the economy where the tightening is unambiguous.
Households are not doing what they say they will
Consumer confidence has been collapsing all summer — the September reading was the second-lowest in a series that starts in 1952. The open question was whether that was showing up in what people actually spend.
It is not. August retail sales rose 1.2% against an expected 0.8%. The core measure, which strips out the volatile categories, rose 1.4% — its strongest month in two years and still strong after inflation. Gains were broad: restaurants, online, electronics, clothing, furniture, groceries. An independent weekly measure of chain-store sales accelerated in the same week.
So the same households registering near-record pessimism just had their best real spending month in two years. In this cycle, how people say they feel is not telling us what they will do.
What we think is actually happening is a squeeze running through housing and fuel rather than a pullback in purchases. Some of that 1.2% went straight into the gas tank. That points to pressure on retailers' profit margins rather than on sales volumes — a different problem, and one that becomes testable when third-quarter earnings arrive next month. Consumer-facing stocks have been among the market's worst performers all year even as consumer spending has held up, which is consistent with that reading.
The tension in how we are positioned
Worth being open about a trade-off in the portfolio, because it shapes what happens from here.
Several of our positions would benefit if the Federal Reserve is forced to reverse course — if the stock market breaks, or oil falls and policy eases. Our energy holdings are positioned the other way and have been the best performers in the portfolio this year.
That is deliberate. The portfolio is built from pieces that are not supposed to move together, so that a single surprise cannot damage all of it at once. But holding both sides of the most important force in the market costs something in the meantime, and we have a view on how that force ultimately resolves. Weighing that cost against that view is the work in front of us now.
What our internal gauge says
Our internal conditions gauge — the composite of 67 economic and market measures we score every week — rose to +5.97 from +4.48, better than roughly 94% of the past four years.
Five of the 67 measures changed. Three improved: retail sales, single-family housing construction, and a ratio of leading to current economic indicators. Two deteriorated: builder confidence, and industrial production, where manufacturing output fell for the first time in seven months.
It rose in a week when the Fed raised rates, long-term yields touched 5% and mortgage rates hit a 20-month high — because most of what this gauge measures is economic activity, and activity was strong nearly across the board. It is a reading on conditions, not a policy forecast, and it is not built to flinch at a hawkish headline.
One thing underneath the level is worth flagging. Market breadth continues to narrow. The S&P 500 sits about 2% below its high, but only around a third of its member companies are above their 50-day average price, and leadership has narrowed to energy and technology alone. A market near its high with participation that thin is really two different markets.
What we are watching
Wednesday, September 30 is the week that matters. August personal spending, personal income, the savings rate and the Federal Reserve's preferred inflation measure all arrive the same morning. That cluster will confirm or contradict the retail sales figure above.
Friday, September 25 brings the final reading on consumer confidence and household inflation expectations.
Wednesday, October 28 is the next Federal Reserve decision. The market currently puts the odds of another increase then at roughly 55%, and at roughly 90% for an increase by the December meeting. The language will tell us more than the decision.
This commentary is provided for informational and educational purposes only and does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation regarding any security, sector, or investment strategy. The views expressed reflect the opinions of Private Wealth Advisors as of the date written and are subject to change without notice. Information has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Past performance is not indicative of future results, and all investing involves risk, including the possible loss of principal. Nothing contained herein should be construed as personalized investment, tax, or legal advice.
*The section titled "The Fed Can't Print Oil" was drafted with the assistance of artificial intelligence tools under the direction and editorial review of Marty Mazorra, Chief Investment Officer of Private Wealth Advisors. All analysis, conclusions, and final content are his own.
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