The Fed may already have tightened

Andrew Alexander | Chief Investment Officer, GWA Asset Management

15 September 2026

The Federal Reserve may already have delivered part of the tightening investors expect this week. By doing precisely nothing to its policy rate, it may have done quite a lot to the cost of money.

That is the possibility I believe deserves greater attention ahead of Wednesday’s FOMC decision. The debate over a quarter-point increase should take account of the change in borrowing conditions since Jackson Hole.

On 28 August, Kevin Warsh made clear that the Fed needed convincing evidence of progress towards its inflation objective. His speech also stressed that market prices and the availability of credit should inform policy. Those signals have since become more demanding for borrowers.

The 10-year US Treasury yield illustrates the shift. The official daily reading was 4.67% on 27 August and 4.73% on the day of the speech. On 15 September, the benchmark market yield was quoted at approximately 5.03%. That is around 30 basis points above the Jackson Hole day’s reading, and 36 basis points above the preceding day.

Those changes matter well beyond the bond market. Treasury yields help set the price of new mortgages and corporate borrowing. As financing becomes more expensive, prospective homebuyers can afford less, refinancing becomes harder and businesses need stronger prospective returns to justify investment. Existing fixed-rate borrowers are insulated initially, so the effects emerge over time.

Higher bond yields also make future corporate earnings less valuable in today’s money and increase the competition that equities face from bonds. Financial markets can therefore transmit restraint before a central bank vote to change its headline rate.

My interpretation is that Jackson Hole helped bring some of that restraint forward. Expectations of a firmer Fed response have encouraged markets to reprice borrowing costs in advance. The economic effect of policy can begin with the expectation of action.

It would be too neat to attribute the entire yield increase to one speech. Higher oil prices, inflation concerns and heavy debt issuance have also contributed. Nor is a 30-basis-point rise in the 10-year yield equivalent to a 30-basis-point Fed hike. Inflation expectations and the extra return investors demand for holding longer-dated bonds affect that comparison.

Nevertheless, the Fed must judge how much restraint these market moves are likely to deliver. The risk is deciding that more tightening is needed without allowing sufficient time for higher borrowing costs to work through spending and investment.

Friday’s inflation figures leave room for that judgment. Consumer prices rose 0.4% in August, with gasoline accounting for more than a third of the increase. Core prices rose 0.3% over the month, but annual core inflation eased from 2.5% to 2.4%. Monthly pressure has strengthened even as the annual measure has improved.

Governor Christopher Waller had already set out a conditional case for a hold if inflation continued to improve, while leaving a hike open if progress reversed. His focus was PCE inflation, the Fed’s preferred measure, which differs from CPI. The latest figures require judgment across the evidence.

For me, a pause would allow time to assess the restraint already delivered and whether energy price pressures are spreading. Higher rates can contain demand and inflation expectations. They cannot restore disrupted energy supplies, and their costs fall on businesses and households already absorbing higher prices.

The challenge is preserving credibility. If a hold caused markets to abandon expectations of future action, some tightening could unwind. Equally, if investors saw it as tolerance of persistent inflation, longer-term yields could rise further. A successful pause would need a convincing explanation and a clear willingness to act if underlying inflation deteriorated.

A credible hold could support equities, including technology businesses sensitive to changes in long-term discount rates. The opportunity would depend on the bond market accepting the decision as sound policy. The explanation and subsequent yield response could matter as much as the vote.

I favour giving serious weight to the tightening that has already occurred. The Fed should assess what higher borrowing costs are likely to achieve before deciding how much more restraint the economy needs. An unchanged policy rate can still accompany a meaningful change in financial conditions.

This article is for information only and does not constitute investment advice or a personal recommendation. Capital is at risk, and the value of investments can fall as well as rise.