Market Update 1/12/26

Why Long-Term Rates Could Drive Markets in 2026

One of the key financial questions of 2026 will be the direction of long-term interest rates. The Trump administration has been clearly focused on pressuring the Federal Reserve to lower rates, a point underscored over the weekend by the Justice Department’s criminal inquiry into comments Fed Chair Jerome Powell made regarding the reconstruction of the Federal Reserve building. While the inquiry may be politically motivated—and Powell has pushed back against that characterization—it has added another layer of uncertainty to the rate outlook.

It’s important to remember that the Federal Reserve directly controls short-term rates, such as the federal funds rate and the discount rate, which have limited direct impact on most consumers. Long-term rates, however, are set by the market. Despite recent cuts to short-term rates, the 10-year Treasury yield has risen roughly 25 basis points over the past six months.

One potential driver of higher long-term rates is the growing federal budget deficit, which the bond market may be increasingly factoring in. Whatever the underlying cause, long-term rates are worth watching closely. If they continue to rise, the impact would be felt across nearly all asset classes, and we would adjust portfolio allocations accordingly.