For two years the market's default sentence was “the cuts are coming.” Instead the Fed hiked on September 16, the 10-year Treasury sits near 5.3%, and the 30-year mortgage has touched 7.28%. Higher-for-longer is no longer a risk to hedge; it is the regime to plan inside.
This is the first of four letters published together in October 2026, examining the regime the economy has actually entered: higher-for-longer rates, a multi-speed expansion, geopolitics as a macro driver, and what all three mean for 2027. Start with the rate story, because the rate story changed its tense. For two years the default sentence in markets was "the cuts are coming." The Federal Reserve instead raised rates on September 16, the 10-year Treasury sits near 5.3%, and the 30-year mortgage has touched 7.28%.
The Fed raised its target range by 25 basis points on September 16, to 3.75%–4.00% (the subject of Letter 200). Since then the argument has moved again. The September jobs report, released October 2, showed only 29,000 jobs added against roughly 85,000–90,000 expected, with unemployment at 4.2%. Traders cut the odds of an October hike to around 25%, and Goldman Sachs moved its next-hike call to December. JPMorgan's Michael Feroli put it plainly: "It would now take a very strong CPI to make the October meeting live." Yet the 10-year Treasury yield stayed around 5.28%, and core PCE inflation — the Fed's preferred gauge — has risen month over month for twelve consecutive months. The live debate is no longer when cuts resume. It is whether the Fed hikes once more in December.
| Measure | Level | What it tells you |
|---|---|---|
| Fed funds target | 3.75%–4.00% | Hiked Sept. 16 |
| 10-year Treasury yield | ~5.28% | About 1.3 points above the top of the Fed's range (NGE arithmetic) |
| 30-year mortgage (Freddie Mac, Oct. 1) | 7.28% | About 2.0 points above the 10-year; highest since Nov. 2023 |
| October hike odds after jobs report | ~25% | Down sharply; December now the focus |
| Headline CPI (Aug.) | 3.4% | Core CPI only 2.4% — energy is doing the damage |
| Payrolls (Sept.) | +29,000 | Aug. revised to +133,000; July to –10,000 |
The “cuts are coming” narrative rested on a specific sequence: inflation cools while the labour market stays firm, giving the Fed room to ease. In 2026 the sequence arrived in the wrong order. The labour market softened first — a 29,000 payroll print, downward revisions of 60,000 to the prior two months — while headline inflation did not cool, because the largest driver is energy. The August CPI showed the energy index up 16.3% over twelve months and gasoline up 27.4%. A supply-driven price shock is not something an easier policy rate removes, and easing into it risks letting short-run expectations drift: the University of Michigan survey's year-ahead inflation expectation is 4.6%.
There is also a second, quieter force: the long end. The 10-year yield is about 1.3 points above the top of the policy range, which means the bond market is demanding more than the Fed is charging. Fiscal supply is one plausible reason — the CBO reported a deficit of roughly $2 trillion in the first eleven months of fiscal 2026, with net interest costs up 12% — though the split between fiscal, inflation-risk and term-premium effects is an inference, not a measured fact. What is measurable is the transmission: mortgage buyers do not borrow at the Fed funds rate, and the rate they pay moved up more than the policy rate did.
Market pricing in this regime is unusually unstable. The October hike odds collapsed in a single morning on one employment report, and the next large swing factor — September CPI, due October 14 — could reverse it. Economist Bill Adams of Fifth Third noted that upcoming inflation reports have more power to sway the next decision than the jobs report did. Treat any single reading of the rate path, including this letter's, as a snapshot. The claim that the long end is pricing something the Fed is not is also an interpretation; term-premium estimates differ across models.
The question that mattered in 2024 was when the cuts would arrive. The question that matters now is what you own if they don't.
The opposite error is real. The same labour data that argues against hikes could, if it repeats, turn a higher-for-longer regime into an abrupt easing cycle — and an investor positioned only for permanently high rates would then be on the wrong side. One soft jobs report is also not a trend: August was initially reported at 162,000 and later revised to 133,000, and monthly payrolls are noisy. Finally, "regime" is a judgment about persistence. If energy prices fall and core inflation stays at 2.4%, the Fed could look through the headline and the timeline could snap back.
The “cuts are coming” habit of mind was built for a cycle that no longer exists. The more useful discipline is to plan for a policy rate that stays near 4%, a long end that keeps its own opinion, and a path that can reverse on a single CPI print. Own duration you can afford to be wrong on, and judge every position by what it earns if the cuts do not come.