After the Fed's First Hike Since 2023, Credit Is Being Repriced From the Top Down

The Federal Reserve raised the target range for the federal funds rate by a quarter point on Sept. 16, to 3.75% to 4%. It was the central bank's first increase since July 2023, and the vote was unanimous.

"Inflation remains elevated," the Federal Open Market Committee said in its statement. "Today's policy action will support a timelier return to the Committee's 2 percent goal." Officials' projections pointed to one more increase before the end of the year, according to Kiplinger's coverage of the meeting.

The more consequential move came in the bond market.

The market moved further than the Fed

Treasury yields rose across maturities during September. The two-year yield, which tracks expectations for the policy rate, climbed from 4.39% on Sept. 1 to 4.88% on Sept. 30, according to Treasury Department data. The 10-year yield, which anchors most fixed-rate lending, rose from 4.79% to 5.29%.

Benchmark	Sept. 1	Sept. 30	Change
Fed funds target (upper bound)	3.75%	4.00%	+0.25
2-year Treasury yield	4.39%	4.88%	+0.49
10-year Treasury yield	4.79%	5.29%	+0.50
10-year minus 2-year	0.40	0.41	+0.01

Because both ends of the curve rose by roughly the same amount, the gap between them was almost unchanged at the end of the month. That does not mean the month was calm. As we describe in our analysis of the yield curve, the curve flattened sharply around the Fed decision and then steepened again in the final week.

How the move reaches borrowers

Floating-rate credit reprices first. Wells Fargo and Bank of America raised their prime rates to 7% effective Sept. 17, the day after the decision, WFAE reported. Credit lines, construction loans and many bridge loans are priced at a spread over prime or SOFR, so their cost rises at the next reset.

Fixed-rate credit follows the 10-year. Commercial mortgages and long-term rental loans are typically priced as a spread over Treasury yields of similar maturity. A half-point rise in the 10-year raises the base for new fixed-rate loans by about the same amount, before any change in spreads. Freddie Mac's weekly survey put the average 30-year fixed mortgage rate at 7.03% on Sept. 24, up from 6.30% a year earlier.

The hurdle for private credit rises. Investors in debt funds and private loans compare those yields with what they can earn on government debt. With a two-year Treasury near 4.9%, a private loan now has to offer more to compensate for its credit and liquidity risk. That pressure flows back to borrowers as higher rates or tighter terms.

What to watch

The Federal Open Market Committee's next scheduled meetings are Oct. 27–28 and Dec. 8–9, according to the Fed's calendar. The December meeting will include a new set of economic projections. Our guide to the Fed calendar lists every scheduled meeting through 2027.