I’m undertaking a 1000-day reinvention project, blogging here daily to track my progress. In Wednesday Wealth, I write about money management, retirement, estate, and long-term care planning.
Markets are nervously awaiting today’s Fed decisions about interest rates, and so am I, even though I don’t know what will happen to my various investments no matter what happens. CME FedWatch shows a 92.5% probability of an interest rate hike of at least 25 basis points, taking the federal funds target rate (FFR) range from 3.5% to 3.75% up to 3.75% to 4%.
On Twitter, Eric Wallerstein, Chief Macro Strategist for Clocktower Group outlines three options:
– Hawkish hold: leave rates unchanged but guide overtly hawkish in the Summary of Economic Projections.
– Dovish hike: raise 25bps but suggest just one-to-three adjustment hikes, then done.
– Hawkish hike: kick off a full new hiking cycle, guiding two more by January.
Wallerstein continues:
In my opinion, the path of least resistance is to hold but write down 1-2 hikes in the remainder of the year, revise growth and unemployment hawkishly, and raise the FOMC’s 2028 and long-term fed-funds rate (quasi-estimates of neutral).
The neutral rate of interest — known as r* (pronounced “r-star”) — is the rate where monetary policy is neither stimulating nor restricting the economy. It’s not something that can be definitively calculated, but only estimated through various models, imputed via market statistic, or forecasted via survey data. There is therefore debate over where interest rates should be set, even if you use a rule such as the Taylor rule which says that the FFR should be set at r* plus the Fed’s target inflation rate of two percent.
Macro models of the neutral rate disagree right now, with one putting it at 0.8, one at 2.15, and one at 1.42. Meanwhile market statistics suggest that r* as of 2025 was around 2%. FOMC forecasts have become more widely dispersed recently than in the past, with a median of one percent, and a range from the 10th to 90th percentile of 0.375 to 1.65 percent.
Looking at the weight of evidence, current monetary policy appears accommodative, which would tend to drive more inflation than the 2% that the Fed targets.
If the market deems current policy overly accommodative, then an increase in the fed funds rate today could bring long-end rates down. That’s because long-end rates embed a premium to compensate investors for expected inflation.
However, long end rates may not come down even with a rise in the short-term rates. Chief US Economist Anna Wong outlines one possible way that a Fed rate hike could result in higher long-term yields (not in the short term, but over longer periods of time):
Tomorrow, one possible outcome after the Fed hiked, is that we may discover that tightening doesn’t lower long-term yields. If that happens, it would confirm that fiscal is the culprit in the whodunnit saga.
By raising the government’s marginal funding cost, a rate hike enlarges future interest deficits and increases the amount of debt Treasury must place with private investors. If investors doubt that fiscal policy will offset those costs, the term premium could rise, pushing long yields higher and reinforcing the deterioration in debt service.
Some observers think that the global rise in long-term interest rates isn’t primarily due to rising inflation expectations or deteriorating fiscal credibility. Gene Frieda suggests “long-term capital has simply become more expensive as investment demand and public and private debt supply rise relative to the willingness of investors to absorb duration.” If that’s the main explanation for the rise in long-term yields, what would a Fed rate hike today do to those long-term yields? Probably not much.
What I’m expecting: a 25bps hike, a hawkish tone in the press conference outlining more hikes in the future, and a softening of long-term yields immediately after. This will likely result in equity strength, as stocks like lower long-term rates (easier financing for businesses and consumers, leading to stronger economic results).