Weekly Update 9/18/2026: Federal Reserve Lifts Interest Rates in Unanimous Vote
- Retail sales show strength
- JNJ may sell medical device unit
- NextEra sweetens deal with Dominion
- Microsoft boosts dividend
Economic data
The Census Bureau reported that retail sales rose 1.2% in August after a revised 0.5% decline in the month prior. Last month’s figure was above the median estimate in a Bloomberg survey of economists which called for a 0.8% rise. Twelve of 13 categories posted increases, including gasoline stations and online retailers. Nonstore retailers, which refers to online shopping, saw sales rise 2.6% for the month, the most since February 2025. The important back-to-school season was positive for retailers with spending up on clothing, electronics and sporting goods. Control-group sales, which feed into the government’s calculation of goods spending for GDP, rose 1.4%, the most in nearly two years. Receipts at restaurants and bars, the only service-sector category in the report, rose 1.2%, which is especially encouraging given that activities related to the World Cup had concluded in July. It paints the picture of a resilient consumer that continues to find the means to spend even in the face of pricing pressures and a modest job market. Compared with a year earlier, inflation-adjusted average hourly earnings fell for the fifth consecutive month in August. The mega important holiday shopping season is just around the corner, so retailers and investors in the sector are hoping the degree of strength seen in late summer can continue through year end.
The Fed decision
The Federal Open Market Committee (FOMC) decided to raise its benchmark federal funds rate by 25 basis points this week in a 12-0 vote. In July, there were three dissents for a hike, but this week nobody favored staying on hold. In a brief statement, the FOMC said: “Inflation remains elevated. Today's policy action will support a timelier return to the Committee's 2 percent goal. The Committee will deliver price stability.” The decisiveness of a unanimous vote punctuates the brevity of the statement. The target for the federal funds rate is now 3.75%-4.00%. The FOMC is now back to the rate it established on October 29, 2025. The difference being at that time the Fed was actively reducing rates from the peak range of 5.25%-5.50% established the last time the Fed hiked rates on July 26,2023. Now, the Fed is pushing rates higher in response to pricing pressure that is keeping inflation at a range way above the Fed’s announced 2.00% target, which it has breached for five and a half years and counting. The SEP does not see headline inflation reaching that target until 2029.
September also marked the release of an updated summary of economic projections where the Fed governors publish their outlook on a number of economic metrics for 2026, 2027 and the long term. Eighteen members (which includes non-voting members of the FOMC) submitted forecasts, but Fed Chair Kevin Warsh did not. He has consistently voiced his displeasure of providing so-called forward guidance, and, therefore, the lack of a prognostication from him was not a surprise. Sixteen officials projected at least one more rate increase this year, up from six in June. The median projection for 2027 pointed to no additional rate hikes next year. Nonetheless, eight officials penciled in another quarter point higher by the end of 2027 compared to where rates stand now. The GDP estimate for 2026 rises from 2.2% to 2.3%, and the inflation forecast was also increased by a tenth of a percent. The unemployment rate forecast came down from 4.3% in June to 4.1%.
At the post-meeting press conference, Chairman Warsh gave some further color into the decision. He said that there are too many categories in pricing indices that are rising at a 3% pace or more on a six-month and 12-month annualized basis. Clearly, underlying inflation is not moving to the target “clearly and at sufficient speed.” Warsh was “selective” in the Q&A session, choosing to provide a curt answer to inquiries and not allowing any follow-up questions. The increase was described thusly: “We removed a dose of accommodation so that financial and credit conditions would be more consistent with our ultimate objectives.” As one television commentator noted: they did it because they could. With labor markets close to “full employment,” the Fed is no longer stuck between a rock and a hard place when it comes to monetary policy. Previous Chair Jerome Powell described it as the Fed having no zero risk path forward. In other words, a rate hike could lead to a crumble in the then fragile job market, while a rate cut could spike inflation even further. Now, with this week’s initial unemployment claims falling to one of the lowest readings since 1969 and continuing claims dropping to a more than two-year low, there are plenty of signals of labor market stability, affording the Fed room to adjust rates. Last year’s FOMC cuts were insurance against a labor-market slump that never appeared, and Warsh & co. now feel confident enough to remove this “accommodation.”
The Federal Reserve controls the short-end of the fixed income maturity spectrum through its overnight borrow rate known as the federal funds rate, which they just raised. Government instruments from Treasury bills out to the 2-year maturity follow closely this ultra short term range. However, longer maturities are less controlled by the Fed, allowing instruments like the 10-year note, which Warsh called the single most important monetary security, and the 30-year bond, which determines the fate of the massive U.S. mortgage market, to float relatively freely. What was happening was the “real” rate of interest was being kept low by the Fed’s policy while inflation stayed higher than officials wanted it to. That is a bad idea because it fuels even higher inflation in the future and creates the potential that inflation expectations become “unanchored,” which could create a doom loop of ever higher prices.
What is particularly pernicious about this cycle is that there have been two supply shocks that have lasted longer than anticipated. The first came last year when President Trump instituted sweeping tariffs across broad sectors of the economy. While that authority has been revoked by the Supreme Court, the administration has not stopped in its efforts to apply levies using other means. Second, the war in the Middle East did not end as quickly as the conflict in Venezuela. As expectations have reset, the cost of a barrel of oil has returned to triple digits recently for both West Texas Intermediate (the U.S. benchmark) and Brent (global) crude. The textbook response by central banks to supply shocks is to look through them because eventually supply and demand even out, much quicker than it would take higher or lower rates to take effect. Yet, the war is going on six months now and counting. Prediction markets apply a 13% chance that traffic in the Strait of Hormuz returns to normal levels (as defined by 60 tankers passing each day) by January of next year. With all 435 House seats and 35 Senate seats up for election in midterms, the chance of Congressional intervention to halt hostilities is slim to none as lawmakers have already reduced workloads to allow for maximum time in their home districts for campaigning not debate over military force.
Warsh referred to geopolitics as the reason for what changed over the past seven weeks since the last Fed meeting when the vote was to hold rates steady and also gave it as a reason why longer bond yields are trending higher. He has repeatedly said that his Fed would be committed to a discipline, not a decision. That meant the Fed would give less forward guidance on what to expect because, in Warsh’s opinion, it tied the Fed’s hands. Now, the markets will have to look to headlines to determine what the next moves might be. The SEP is showing that the FOMC sees the fight against inflation as just beginning. Warsh’s vote agreed with that assessment. Between now and the next Fed meeting on October 28, investors will be focused on what might sway votes one way or another.
Company Events
SGK writes additional weekly commentary for clients of the firm detailing recent events and earnings of core equity holdings.
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Steigerwald, Gordon & Koch, Inc. [“SGK”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from SGK. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. SGK is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the SGK’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.sgkwealthadvisors.com. Please Note: SGK does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to SGK’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a SGK client, please contact SGK, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.