Rate of Change

First, as investors, we have to acknowledge that the last time the Fed raised interest rates was in July 2023, during what market participants would broadly acknowledge as the final hike within a defined tightening cycle. The Fed was highly focused on inflation at the time, with its press release emphasizing risks of higher prices, low unemployment and robust job gains.¹ Wednesday’s decision reiterated Chair Warsh’s 2% target inflation-fighting commitment, a position firmly established at the Fed’s Jackson Hole symposium one month prior.

Similar to how markets did not know the July 2023 hike would be the tightening cycle’s last salvo, a central takeaway is that markets do not know now if Wednesday’s hike is the beginning of a tightening trend or a singular adjustment. Investors centered on the phrase “we removed a dose of accommodation” early in Warsh’s opening press conference statement, interpreting it as a possible signal that further doses would be removed later through additional rate increases.² Further, since the decision was unanimous with no dissenters, for only the second time in eight meetings, investors are left thinking the Fed is unified in its inflation fight.

In July 2023, the Fed’s key interest rate target stood between 5.25% and 5.5%, while Wednesday’s decision moved the target rate to between 3.75% and 4%. Recognizing the economy was in a different place three years ago, markets increased their probabilities of higher interest rates through the summer and fall of 2027, and at one point on Wednesday to almost a full percentage point above where effective Fed funds rates were pre-meeting.³ Because Chair Warsh again distanced himself from providing forward guidance, we anticipate capital markets will remain more reactive to inflationary data points at both the consumer and producer price levels.

We caveat this section by saying that Chair Warsh has not provided a substantive update on the five task forces he announced during his first Fed press conference, and that current practices are subject to change. For now, current Federal Reserve practice is for committee members to submit their growth, inflation, employment and interest rate forecasts for the next few years and over the long run. Chair Warsh once again abstained from submitting his own projections but communicated his fellow committee members’ views. The Fed’s forecasts were largely unchanged outside of higher rate expectations for this and the next two years.

Two key focal points emerged, however. First, Chair Warsh emphasized his focus on trend data and multiple data points versus any one indicator. Inflation’s breadth across consumer categories has Warsh’s attention, and he noted in Jackson Hole that looking within subcomponents of data released such as the Consumer Price Index and the Personal Consumption Expenditures Index is relevant to his forward views.⁴ In Wednesday’s speech, Warsh noted “too many categories are still posting increases above 3% on both a 6- and 12-month basis.”⁵

Second, Chair Warsh did provide further insight when answering a reporter’s question regarding what increases in long-term bond yields signal for growth. Warsh cited three explanations for why interest rates have risen: strong economic growth, competition for capital emanating from hyperscaler and large technology company expenditures within the AI ecosystem, and geopolitical pressures given multiple global hotspots.⁶ This communication underscores Warsh’s commitment to interpreting market prices, a signal he provided during his Jackson Hole speech.⁷ Coupled with the Fed’s departure from forward guidance, this suggests we may have a more defined role reversal: the Fed reading market prices versus markets being priced by Fed interpretations.

5% has been a key psychological level for the U.S. Treasury note, one that has been crossed intraday but, until earlier this week, did not close above 5% since 2007 and touched levels intraday on Tuesday not seen since July of that year. While markets flirted with the 5% level back in 2023 (the same year of the last Fed tightening cycle), recent days reflect more defined price action above that level.

What we have noticed is more popular press coverage on what interest-rate changes may mean for Main Street, a topic on which we defer to our economics team. Considerations like mortgage rates above 7%, coupled with still-elevated energy and food prices, can challenge earnings estimates (more on that topic below). However, as we have stated in prior editions of these pages, touching 5% is different than a sustained move above 5%.

Lost in this week’s news flow is not only a decline in longer-maturity bond yields following the Fed meeting, but that the Bank of England opted to leave interest rates unchanged at their policy meeting Thursday in a 6-3 vote, with three members preferring to increase rates by 0.25%. The committee opted to see more evidence before raising interest rates, noting that “the geopolitical environment was highly uncertain and there remained scope for the inflation outlook to change materially as events unfolded.”¹⁰ On Friday, the Bank of Japan raised its target interest rate to 1.25% as expected, but the 7-2 vote, with two dissenters wanting to stand pat on rates, suggests that some policymakers may want to see how variables like crude oil and semiconductor price increases, along with a sharply depreciating yen, may interact with inflation given policy tightening to date.¹¹

Based on positioning data, investors remain more bearish on bonds relative to long-term history, with quarterly net investor positioning close to the lowest levels since 1993.¹² Bond returns are a function of two things: price movements and coupons. As interest rates head higher, investors compound at higher coupons, and taxable investors can pick up additional compensation through attractive tax-equivalent yields without taking on too much duration risk. While central banks may leave investors intrigued by potentially higher short-term interest rates, these instruments rarely benefit investors over longer time periods net of inflation and opportunity cost elsewhere. 

In a high-profile series of headlines that included resignations of a senior Anthropic developer and a Google DeepMind safety researcher, leaders from OpenAI, Anthropic, xAI and Google DeepMind publicly agreed to “pace the frontier” or slow the rate at which frontier, or closed, AI models add capabilities. On his personal website, Anthropic CEO Dario Amodei posited that “we should not stop AI progress, but we should deliberately slow the speed at which frontier models become more capable so that safeguards can catch up.”¹³ Earlier this week, technology companies sold off in response, with concerns that the ecosystem’s potential slowdown would have material effects on earnings growth.

 To be sure, the AI ecosystem remains the primary earnings growth driver. For domestic large-cap equities, as measured by the S&P 500, analysts expect 12% earnings growth this year, 14% next year and 16% in 2028.¹⁴ Sales growth estimates are in the upper single digits for all three years, and AI’s downstream impacts carry significant weight in those estimates; AI impacts utilities, energy, real estate, financials and, of course, the usual tech-laden sectors.¹⁵ Capital expenditure estimates continue to get revised higher and, so far, capital markets are allowing companies that monetize demand, while still building for the future, to raise both equity and debt capital. The balance of demand outstripping supply remains paramount to capital markets’ acceptance of higher spending.

Our working hypothesis remains that, while the pace of rollout may slow, AI uptake across businesses and consumers will not. Further, we expect the desire to win the AI arms race will push companies to only modestly restrain development, and plenty of soundbites about the U.S. versus China development path will continue to spur advancements. We have cited Stanford’s 2026 AI Index before and encourage readers to curl up to its 425 pages (or at least have an AI agent summarize them): One of the main findings is how disparate adoption is by industry and geography, and we expect those differences to converge over time.¹⁶

¹ Board of Governors of the Federal Reserve System. “Federal Reserve Issues FOMC Statement.” Federal Reserve Press Release. July 26, 2023. https://www.federalreserve.gov/monetarypolicy/files/monetary20230726a1.pdf. Accessed 17 September 2026.

² Board of Governors of the Federal Reserve System. “Transcript of Chairman Warsh’s Press Conference, September 16, 2026.” Federal Reserve Media Center. September 16, 2026. https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20260916.pdf. Accessed 17 September 2026.

³ Northern Trust Wealth Management Research, Bloomberg. Probabilities as of September 18, 2026. Data accessed on terminal.

⁴ Board of Governors of the Federal Reserve System. “In Our Time. Chairman Kevin Warsh at “Financial Innovation: Implications for Payments and Policy, an economic policy symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming.” Speeches. August 28, 2026. https://www.federalreserve.gov/newsevents/speech/warsh20260828a.htm. Accessed 17 September 2026.

⁵ Board of Governors of the Federal Reserve System. “Transcript of Chairman Warsh’s Press Conference, September 16, 2026.” Federal Reserve Media Center. September 16, 2026. https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20260916.pdf. Accessed 17 September 2026.

⁶ Board of Governors of the Federal Reserve System. “Transcript of Chairman Warsh’s Press Conference, September 16, 2026.” Federal Reserve Media Center. September 16, 2026. https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20260916.pdf. Accessed 17 September 2026.

⁷ Board of Governors of the Federal Reserve System. “In Our Time. Chairman Kevin Warsh at “Financial Innovation: Implications for Payments and Policy, an economic policy symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming.” Speeches. August 28, 2026. https://www.federalreserve.gov/newsevents/speech/warsh20260828a.htm. Accessed 17 September 2026.

⁸ Northern Trust Wealth Management Research, Bloomberg. Data as of 9/17/2026, Accessed on terminal.

⁹ Ibid

¹⁰ Bank of England. “Monetary Policy Summary and minutes of the Monetary Policy Committee meeting ending on 16 September 2026.” September 17, 2026. https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-summary-and-minutes/2026/monetary-policy-summary-and-minutes-september-2026.pdf. Accessed 17 September 2026.

¹¹ The Bank of Japan. “Changes in the Guideline for Money Market Operations.” September 18, 2026. https://www.boj.or.jp/en/mopo/mpmdeci/mpr_2026/k260918a.pdf. Accessed 18 September 2026.

¹² Northern Trust Wealth Management Research, Bloomberg, CFTC. Accessed on terminal 17 September 2026.

¹³ Amodei, Dario. “We Must Pace the Frontier.” September 12, 2026. darioamodei.com. Accessed 18 September 2026.

¹⁴ Northern Trust Wealth Management Research, Bloomberg. Accessed on terminal 17 September 2026.

¹⁵ Ibid

¹⁶ Sha Sajadieh, Loredana Fattorini, Raymond Perrault, Yolanda Gil, Vanessa Parli, Lapo Santarlasci, Juan Pava, Nestor Maslej, Russ Altman, Erik Brynjolfsson, Carla Brodley, Jack Clark, Virginia Dignum, Vipin Kumar, James Landay, Terah Lyons, James Manyika, Juan Carlos Niebles, Yoav Shoham, Elham Tabassi, Russell Wald, Toby Walsh, Dan Weld. “The AI Index 2026 Annual Report,” AI Index Steering Committee, Institute for Human-Centered AI, Stanford University, Stanford, CA, April 2026. https://doi.org/10.48550/arXiv.2606. Accessed 18 September 2026.