Markets were lower in September, as interest rates moved higher. The effects of the uptick were felt throughout equities, bonds, and other asset classes. The change in rates was felt more in longer-dated bonds than in bonds nearer to maturity and incrementally more in the US treasury market, as spreads for riskier borrowers remained relatively low.
The Federal Reserve met in September and left rates unchanged, but their forecast was updated to reflect a tighter Fed Funds rate for a longer period of time with less easing in 2024 than in their previous forecast. Treasury yields spent the rest of September grinding higher, as investors have finally begun to place greater weight on Fed forecasts than their own.
Higher rates further out the yield curve may have more of a tightening effect on the economy than short term rates. To date, the effects of higher interest rates have mostly been born by the federal government itself and heavily indebted borrowers with financing linked to short-term rates. However, interest rates for mortgages and auto loans have also been marching higher, which could dampen the consumer’s ability and, perhaps, willingness to borrow.
The inflation data seems to be trending in the right direction, but whether that continues without a slowdown, or perhaps reverses because the economy is too strong, remains to be seen. There are reasons to think it could continue to trend the right way, even without a slowdown, but that process may be uneven and potentially take longer to unfold.
There are a range of plausible forecasts for the economy, inflation, interest rates, and the market. However, we observe that historic relationships and correlations have seemed a bit less stable the last several years. In our view there are a variety of potential outcomes, and we would caution against overconfidence in any one forecast.
