09/18/2026
For the week of September 18, 2026 — Vol. 24, Issue 38
This past week the Federal Reserve raised rates for the first time in three years. Let's discuss what happened and take a look at the week ahead.
The Fed meeting
What a difference a Fed meeting makes, or maybe not.
The Fed raised rates this week, but despite the move, longer-term rates have been relatively subdued thus far. That is an interesting development, particularly when we look back at what happened when Powell began cutting rates.
In September 2024, Powell and the Fed kicked off an easing cycle with a jumbo 50bp rate cut. Yet rather than following the Fed lower, longer-term Treasury and mortgage rates subsequently moved higher.
Now we have almost the opposite situation. The Fed is hiking rates, yet the initial reaction in the bond market has been relatively contained.
It's another important reminder that the Fed does not directly control mortgage rates.
There is a common misconception that when the Fed raises rates, mortgage rates automatically rise with it.
That's not necessarily how it works.
The Fed directly controls the overnight Fed funds rate, which has a much greater influence on short-term borrowing costs. So this week's hike can have a more immediate impact on things like HELOCs, credit cards and other short-term or floating-rate loans.
Mortgage rates are different. They are much more closely tied to the longer end of the bond market, particularly the 10-year Treasury, along with expectations for inflation, economic growth and the spread between Treasuries and mortgage-backed securities.
That helps explain the somewhat subdued reaction in mortgage rates following the Fed's hike.
There is also another possibility worth considering.
The bond market may ultimately embrace the Fed's tougher stance on inflation.
Remember, inflation is the arch enemy of bonds. If investors become convinced the Fed is serious about bringing inflation under control, tighter monetary policy today could ultimately reduce some of the inflation risk embedded in longer-term yields.
In other words, Fed hikes do not automatically equal higher mortgage rates.
But there is another side of the equation the Fed watches — economic growth.
Warsh said economic growth is accelerating, and this week's retail sales report certainly gave that argument some am******on.
Retail sales strong
As uncomfortable as this move has been, remember that the last several times the 10-year traded between roughly 4.5 percent and 5 percent, yields eventually reversed lower.
Could it happen again?
Mortgage rates have also risen sharply since the conflict began, but perspective matters: we are at the highest mortgage rates since last May, not the highest rates in many years.
One reason is the spread between mortgage rates and the 10-year Treasury. That spread has helped keep mortgage rates from rising point-for-point with Treasury yields. In other words, while Treasuries have taken a significant hit, mortgages have performed comparatively better.
5 percent
August retail sales rose a stronger-than-expected 1.2 percent, easily beating expectations for an increase of roughly 0.7 percent to 0.8 percent.
Even when removing gas and autos, where changing energy prices can distort the headline number, sales increased a healthy 1.2 percent.
But perhaps the most important figure for the broader economy was the Retail Sales Control Group, which surged 1.4 percent.
Why should we care about the control group? Because it more closely feeds into the calculation of consumer spending within GDP.
Consumer spending remains a major driver of the U.S. economy. When the control group is expanding at this kind of pace, it suggests consumers continue to spend and provides another positive input for economic growth.
And therein lies the challenge for bonds.
The market may like a Fed that is serious about inflation, but stronger economic growth can also keep upward pressure on longer-term interest rates.
That brings us to perhaps the most important number in the bond market right now.
