The Fed Raises Rates for the First Time Since 2023: What It May Mean for Bonds, Stocks, and Alternatives
The Federal Reserve lifted its target range to 3.75%–4.00% on September 16 and signaled that it may not be finished. Here is how bonds, bond ETFs, equities, and alternative assets responded, and the questions investors may want to consider.
On September 16, 2026, the Federal Open Market Committee raised the target range for the federal funds rate by a quarter of a percentage point, to 3.75%–4.00%. The vote was 12–0. It was the first rate increase since July 2023 and a notable reversal from the rate cuts that preceded it. This article summarizes what the Fed said, how major asset classes reacted in the first day of trading, and the range of views on what may come next. It is general information, not a forecast or a recommendation.
What the Fed decided, and why
The Committee’s statement was direct: “Inflation remains elevated,” and the increase is intended to “support a timelier return to the Committee’s 2 percent goal.” The statement also described economic activity as expanding at a solid pace and noted that the unemployment rate has changed little, while acknowledging that uncertainty remains elevated, in part because of geopolitical developments.
At his press conference, Chair Kevin Warsh said that “inflation is too high and has been for too long” and declined to “prejudge any future decisions” about the path ahead. The Fed’s updated Summary of Economic Projections shows a median federal funds rate of 4.1% at the end of both 2026 and 2027, which implies one additional quarter-point increase this year, followed by gradual declines to 3.9% in 2028 and 3.6% in 2029. Policymakers’ median projection for 2026 PCE inflation rose to 3.7%, and the median does not show inflation returning to 2.0% until 2029. After the meeting, futures markets priced roughly even odds of another increase in October. Projections and market pricing are not commitments, and both have changed substantially over the course of this year.
Bonds: higher yields, with a split between short and long maturities
Much of the adjustment in the bond market took place before the meeting. Longer-term Treasury yields climbed through the summer as investors repriced their inflation outlook, and the 10-year Treasury yield touched roughly 5% ahead of the announcement, its highest level since 2007. On the day of the decision, yields actually eased: the 2-year yield finished near 4.63% and the 10-year near 4.97%, each down about three basis points, after an intraday high on the 10-year of about 5.04%. One interpretation offered by market commentators is that a Fed seen as acting on inflation can reduce the inflation premium built into longer-term yields. Others caution that a single session says little, particularly while oil prices remain above $100 per barrel.
The underlying mechanics are worth restating. As the SEC’s Office of Investor Education explains, market interest rates and bond prices generally move in opposite directions, and longer-maturity bonds carry more interest rate risk. That applies to U.S. Treasury securities as well: the government backs the payment of interest and principal, not the market price before maturity. The other side of the same coin is that bonds purchased today offer meaningfully more income than they did a few years ago, and an investor who holds an individual high-quality bond to maturity generally receives its stated yield regardless of interim price changes, subject to the issuer’s credit risk.
Bond ETFs: duration is doing most of the work
Bond exchange-traded funds translate these dynamics into daily price moves, and the key variable is duration, a measure of how sensitive a fund’s price is to changes in yields. A rough rule of thumb is that a fund with a duration of six years might be expected to lose about 6% of its value if yields at its maturities rise by one percentage point, and gain a similar amount if they fall. Unlike an individual bond, most bond ETFs have no maturity date, so there is no point at which a fund “matures” back to par; instead, the portfolio gradually reinvests at prevailing yields.
Recent fund flows suggest investors have been weighing that trade-off. According to one analysis of ETF flow data, short-term Treasury ETFs took in about $12.2 billion over the 20 trading sessions through September 8, more than one-fifth of their total for the year. The same analysis noted that, as of September 9, a widely held long-term Treasury ETF offered roughly one percentage point more yield than a widely held short-term Treasury ETF while carrying about eight times the duration (approximately 15 years versus less than two). At the same time, long-term Treasury funds also attracted several billion dollars in August, which indicates that some investors view yields above 5% as an opportunity to lock in income.
Neither approach is inherently right. Shorter-duration funds have historically been less volatile when rates rise, but their income resets lower if rates eventually fall. Longer-duration funds may benefit more if yields decline, and may lose more if yields keep climbing. For California residents in higher tax brackets, the after-tax comparison among Treasury, corporate, and municipal bond funds adds a further consideration. The appropriate mix depends on an investor’s time horizon, income needs, tax situation, and tolerance for price swings.
Equities: a measured decline, led by the Dow
Stocks fell on the day, though unevenly. The Dow Jones Industrial Average declined about 1.2%, the S&P 500 about 0.5%, and the Nasdaq Composite finished nearly unchanged. Energy and financial stocks lagged while several large technology companies ended higher. The quarter-point move itself was widely anticipated; market commentary attributed much of the selling to the Fed’s projection of additional tightening and to Chair Warsh’s remarks.
In principle, higher interest rates affect stocks through several channels: they raise the rate at which future earnings are discounted, increase borrowing costs for companies and consumers, and make yields on cash and bonds more competitive with equities. Working in the other direction, the Fed is raising rates in part because the economy has been resilient. The Committee described productivity growth as strong and capital investment as robust, and August retail sales came in above forecasts. How those forces net out is uncertain. Historical patterns following prior rate increases have varied widely and are not a reliable guide to what happens this time.
Alternatives: not one asset class, and not one reaction
“Alternatives” covers very different investments, and the rate increase affects each differently.
Gold. Gold fell about 1.2% on the day of the decision, and silver, platinum, and palladium also declined, as a firmer dollar and higher rates weighed on assets that pay no income. Gold remains at historically elevated prices, and it has at times moved independently of interest rates when geopolitical concerns dominate.
Real estate. Higher financing costs flow directly into property values and deal activity. Lenders and attorneys quoted by Commercial Observer described slower transaction volume and a widening gap between well-capitalized owners and those carrying heavy debt, though one practitioner said a single quarter-point move is unlikely to change the behavior of committed buyers. Separately, a real estate finance attorney noted that loans in process may need to be resized and that maturing loans could face tighter debt-service coverage tests.
Private credit. Most private credit loans carry floating rates, so a rate increase raises lenders’ income and borrowers’ interest expense at the same time. Data cited by Global Finance put the private credit default rate at 6.3% in August, with a large share of those events consisting of maturity extensions and deferred or payment-in-kind interest rather than missed payments. Sources quoted in that article differed on how much a single increase adds to the strain.
Digital assets. Bitcoin dipped briefly to about $75,000 after the announcement before recovering to roughly $76,000, little changed over 24 hours. Digital assets are highly volatile and speculative, and one quiet day should not be read as evidence of stability.
Many alternative investments also involve limited liquidity, less frequent and less transparent pricing, higher fees, and, in some cases, investor eligibility requirements. Infrequent pricing can make an investment appear less volatile than it actually is.
Points to keep in mind
One rate increase rarely justifies overhauling a long-term plan. Markets had largely priced this decision in advance, and reacting to a single event carries its own risks.
The path from here is uncertain. The Fed’s own projections point to one more increase this year, but those projections have shifted significantly since June, and much depends on energy prices and incoming inflation data.
Higher yields cut both ways: they have reduced the market value of existing bonds and improved the income available on new purchases. Understanding the duration of the bond funds you own is a reasonable place to start.
Variable-rate debt, such as credit cards, home equity lines, and some margin and securities-backed loans, generally becomes more expensive shortly after a Fed increase. Cash yields on money market funds and Treasury bills typically rise as well.
Concentrated positions, including employer stock, can amplify the effect of market volatility on a household’s overall finances.
This article is educational only and does not constitute investment, tax, or legal advice; consider consulting a qualified professional about your own situation.
Important Disclosures
Propulsion Capital Management is an investment adviser registered with the State of California Department of Financial Protection and Innovation. Registration does not imply a certain level of skill or training. This article is provided for general informational and educational purposes only and does not constitute investment, tax, legal, or accounting advice, nor an offer or solicitation to buy or sell any security or to adopt any particular investment strategy. References to asset classes, market indexes, categories of exchange-traded funds, commodities, or digital assets are for illustration only and are not recommendations; no specific security is recommended herein. Indexes are unmanaged and cannot be invested in directly. The information is drawn from third-party sources believed to be reliable, including the Federal Reserve Board and the U.S. Securities and Exchange Commission, but its accuracy and completeness are not guaranteed; it is believed to be accurate only as of the date of publication and is subject to change without notice. Market data reflect the close of trading on September 16, 2026 unless otherwise noted, and sources may report slightly different figures. Statements about the Federal Reserve, interest rates, inflation, oil prices, markets, or the economy are the opinions of the sources cited or of Propulsion Capital Management as of the date of publication, are forward-looking in nature, are not guarantees of future events or results, and may not come to pass. Federal Reserve projections and probabilities derived from futures pricing change frequently and are provided for context only. The duration example is a simplified approximation; actual results will differ. Investing involves risk, including the possible loss of principal, and past performance is no guarantee of future results. Bond prices generally fall when interest rates rise, and bonds are also subject to credit, inflation, and liquidity risk. Exchange-traded funds are subject to market risk, may trade at prices above or below net asset value, and charge fees and expenses. Alternative investments, including real estate, private credit, commodities, and digital assets, may be illiquid, volatile, difficult to value, and unsuitable for many investors, and some are available only to investors who meet specific eligibility requirements. Diversification does not ensure a profit or protect against loss. Nothing herein should be relied upon as a substitute for personalized advice from a qualified professional. Links to third-party websites are provided for convenience; Propulsion Capital Management does not endorse, and is not responsible for, the content of third-party sites. Propulsion Capital Management does not provide tax or legal advice; please consult your tax adviser or attorney regarding your specific situation.
