From Rate Cuts to Rate Hikes, How the Bond Market Trajectory Changed

September 21, 2026

By Krista Biernbaum, CFP®, CIMA®
Investment Management Officer

 

Coming into 2026, the Federal Reserve was expected to continue cutting interest rates as it normalized monetary policy. As the year progressed, that path changed. Inflation increased due to higher commodity prices and moved further away from the Fed’s 2% objective. This led policy members to raise interest rates for the first time in over three years and signal more to come.

The Fed's Effort to Restore Price Stability

The Federal Reserve met for its Federal Open Market Committee (FOMC) meeting last week where members voted unanimously to raise the Federal Funds rate, the rate banks charge each other for overnight lending, by 0.25%. This was expected by the bond market and largely priced into yields by the time of the official announcement. Thus, the rate increase itself was a non-event. The reason for the increase is simple; inflation remains well above the Fed’s 2% objective and the FOMC is committed to restoring price stability. 

As Fed Chairman Kevin Warsh noted in his press conference, raising rates “removed a dose of accommodation”, implying this is not a one and done. This is likely the start of more to come with rate increases. The updated interest rate projections released following the meeting showed Committee members anticipate one more 0.25% increase before year end. The bond market is pricing in further tightening into 2027.

Higher Interest Rates' Effect on Bonds

What to expect with a new hiking cycle? First, a little perspective. Today is different than the last hiking cycle in 2022. Why? Starting yields are significantly higher. When the Fed first started increasing rates in 2022, yields were coming off historically low levels, i.e., minimal income to offset falling bond prices. The current higher rate environment provides more cushion to changes in the price of a bond.

A good indicator of future returns in bonds are where starting yields are today. The yield on the 10-year Treasury closed above 5% last week, the highest level since 2007. In other words, intermediate to longer term bonds yields are at their highest levels since the Great Financial Crisis. This presents attractive opportunities for conservative investors to lock in these yields for years to come. If you have any questions about the implications of the Federal Reserve’s policy changes or how higher interest rates may impact you, give us a call today.  Your success matters.