What's Up with Interest Rates?

In what is normally a fairly quiet corner of the investment universe, the bond market is starting to make some noise. With interest rates and inflation moving higher, investors are questioning what the Federal Reserve will do with interest rates.

So, what gives?

Interest rates affect nearly everything; they influence mortgage rates, car loans, student loans, business investment decisions, stock valuations, and, as author Edward Chancellor described in his book The Price of Time, how much people must be paid to postpone consumption. When interest rates move, the effects ripple throughout the entire economy.

Why has this become a bigger deal now?

One pillar of the Federal Reserve's dual mandate is "price stability," which it defines as roughly 2% inflation. Yet as of October 2026, inflation has spent nearly 65 consecutive months above that target. While inflation has come down significantly from its peak, it has not fully returned to where the Fed says it would like it to be.

As a result, investors are increasingly asking a simple question: Is the Fed more concerned about inflation, or economic growth?

To be sure, the Fed cannot simply press a button to dictate interest rates across the entire economy. It primarily influences short-term rates, while investors determine yields further out on the maturity spectrum.

In doing so, they must answer their own question: Is the interest rate being offered high enough?

If inflation is running at 3% and a bond yields 3%, some investors may conclude they are merely preserving purchasing power rather than earning a real return. If enough investors reach that conclusion, bond yields may need to rise before buyers step in.

Businesses face a similar calculation. If a company can borrow money at 5% but expects a new project to generate only a 4% return, it may choose to postpone that investment. When enough businesses make the same decision, economic growth can slow.

This brings us to the challenge facing policymakers today.

With the national debt now exceeding $40 trillion, the cost of servicing that debt has become increasingly important. Higher interest rates may help cool inflation, but they also increase borrowing costs throughout the economy, including the federal government. Lower rates may support growth, but they also risk allowing inflationary pressures to persist.

What makes today's environment particularly interesting is that interest rates themselves are not historically extreme. In fact, rates were considerably higher for much of the latter half of the twentieth century. The difference is that debt levels across households, businesses, and governments are much higher, making the economy more sensitive to where rates ultimately settle.

For investors, the takeaway is less about predicting the next Fed meeting and more about understanding the broader backdrop. Markets are attempting to answer a deceptively simple question: Can inflation return to target without causing a meaningful slowdown in economic growth?

Until an answer emerges, expectations surrounding interest rates are likely to remain one of the dominant forces influencing both bond and equity markets.

-The LVM Team