As retail investors, we’re all feeling a tad overwhelmed by the recent headlines here at TheStreet about shifting Federal Reserve interest rates, surging Treasury yields, and persistent sticky inflation.
Recently, strong economic data and higher energy costs pushed the 10-year Treasury Yield to 5.34%, its highest intraday level since 2002.
These developments have fueled multiple market conversations about an extended tightening cycle at the Fed with more rate hikes to come after theSeptember increase in the benchmark Federal Funds Rate to the 3.75% to 4.0% range.
However, a new UBS Wealth Management note sent to TheStreet anticipates “one further rate increase in December,” and its experts say “resilient economic growth and robust corporate earnings should help equities withstand moderate policy tightening.”
Whew.
Understanding the markets and Fed rate increases
The decision by the policymaking Federal Open Market Committee that raised the federal funds target rate by a quarter point in September was driven largely by high energy prices and robust economic indicators.
Despite these pressures, underlying economic metrics show encouraging signs of stabilization
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J.P. Morgan sees Fed rate hikes going out with a bang this year
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October Fed rate hike hinges on two looming economic reports
It cited the three-month annualized rate of corePersonal Consumption Expenditures — the Fed’s preferred inflation gauge — as having dropped to 2.05% in August, the lowest level since July 2024.
Plus, UBS said the September labor report indicated a cooling trend, with nonfarm payrolls rising by just 29,000, falling well below consensus expectations.
Fed policy discussions also remain balanced, the note said. This includes comments from Fed Governor Christopher Waller, which I reported on, indicating that he is not “greatly concerned” about higher interest rates causing a “damaging slowdown in the economy.” Instead, he is focused on keeping consumer and business inflation expectations anchored.
What a Fed rate increase means for your portfolio
For everyday investors, a measured Fed hiking cycle doesn’t spell disaster for the broader market, UBS said.
In fact, historical data shows that past U.S. economic downturns generally did not begin until at least two years after the Fed kicked off rate increases.
Solid corporate fundamentals further back this: UBS forecasts S&P 500 earnings growth of 25% in 2026 and 14% in 2027.
This profit growth should provide a strong cushion for equities, even as borrowing costs edge slightly higher, UBS said.
