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Written By: Rodney Hathaway, Chief Investment Officer
One of the more unusual developments in financial markets is the possibility that the Federal Reserve could raise interest rates after roughly two years of cutting them. Stronger-than-expected job growth, persistent inflation, and resilient economic activity have caused expectations for monetary policy to shift.¹
For investors, the key question is what higher rates could mean for the bond market. While rising rates can create short-term volatility, they can also create opportunities for investors seeking higher levels of income.
An Unusual Shift in Fed Policy
We previously believed a rate hike by the Federal Reserve this year was unlikely. However, it now appears that a majority of voting members favor an increase. While we do not agree with this move, the Federal Reserve ultimately determines monetary policy.
What makes the current situation unusual is that rate increases typically occur at the beginning of a tightening cycle, rather than during an easing cycle. According to the referenced report, the last comparable situation occurred in 1997, when then-Federal Reserve Chairman Alan Greenspan raised rates despite a generally favorable economic backdrop.²
Today's economy presents a mixed picture. The labor market remains healthy, inflation has been stubborn, and investment related to artificial intelligence and data centers continues to surge. At the same time, housing activity has weakened and geopolitical tensions have pushed energy prices higher.³
Higher Rate Could Create a Bond Opportunity
Higher interest rates can put downward pressure on existing bond prices. However, higher rates also mean that newly purchased bonds may offer more attractive yields.
For investors holding excess cash or those who remain underallocated to bonds, a rate-driven pullback in fixed income could provide an opportunity to put capital to work at higher income levels than were available just a few years ago.
The goal is not to time the market. Instead, periods of higher rates can provide an opportunity to thoughtfully extend duration, improve portfolio income, and rebalance toward strategic fixed income allocations.
The Bottom Line
The possibility of another Federal Reserve rate increase would be unusual following roughly two years of rate cuts. While higher rates may create short-term volatility, they could also improve the opportunity set for bond investors.
For long-term investors, higher yields may provide an opportunity to improve portfolio income and potentially strengthen future total returns once rates eventually stabilize. Our team members are available to discuss how changes in interest rates and the bond market may impact your financial plan and portfolio.
Source
1. https://www.ftportfolios.com/blogs/EconBlog/2026/9/14/rate-hike-likely,-but-unusual
2. https://www.ftportfolios.com/blogs/EconBlog/2026/9/14/rate-hike-likely,-but-unusual
3. https://www.ftportfolios.com/blogs/EconBlog/2026/9/14/rate-hike-likely,-but-unusual