By Timothy C. Murray, CFA

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How far will the Fed go?

Markets expect a mild hiking cycle, but history suggests caution.

October 2026, Multi-Asset

Key Insights

Futures markets are pricing a relatively mild Federal Reserve hiking cycle through the end of 2027, but the history of previous cycles suggests investors should be cautious about assuming a modest endpoint.
Since 1994, five of six Fed hiking cycles have seen the federal funds rate rise by at least 175 basis points (bps) from where the cycle began, highlighting the potential for rates to move further than markets initially expect.
With a higher term premium contributing to longer‑term Treasury yields and relatively little additional yield available for taking duration risk, our Asset Allocation Committee continues to maintain a short duration stance.

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The Federal Reserve changed direction on September 16, raising its target range by a quarter point in its first rate hike since 2023.

But the bigger story is not the 25 basis points. It is that the easing cycle is over, and the burden of proof has flipped. The question now is how far the Fed may ultimately need to go.

For now, investors are expecting a relatively modest move higher in rates.

As of September 23, futures markets were pricing in almost two additional quarter-point hikes by year-end, and just over four hikes in total through the end of 2027.

In other words, markets appear to expect something closer to a mid-cycle adjustment than a full-fledged hiking cycle.

That could certainly prove correct. But history suggests investors may want to take that assumption with a grain of salt.

The modern era of Federal Reserve policymaking began in February 1994, when the Fed started announcing rate changes on the day they were made.

Since then, there have been six hiking cycles. Only one turned out to be a true mid-cycle adjustment.

In the other five cases, the federal funds rate ultimately rose at least 175 basis points from where the hiking cycle began.

The exception was 1997, when the Fed raised rates only once before reversing course. But even that episode proved temporary. After three subsequent cuts, the Fed began hiking again in 1999—a cycle that ended about a year later when the technology bubble burst.

So while the current futures curve may prove accurate, history suggests that once the Fed has started hiking, the endpoint has often been considerably higher than markets initially expected.

More importantly, Fed policy has become a less important driver of longer-term Treasury yields.

Over the two years ended September 23, 2026, the 10-year U.S. Treasury yield increased from roughly 3.73% to 5.10%—an increase of about 137 basis points.

That premium has risen for a variety of reasons, including greater geopolitical uncertainty, persistent inflation concerns, heavy Treasury issuance, and expectations for rising capital expenditures globally.

Those pressures are unlikely to disappear simply because the Fed ultimately delivers a relatively modest hiking cycle.

As a result, even if markets are correct about the path of Fed policy, longer-term yields could continue to grind higher.

At the same time, investors currently are receiving relatively little compensation for taking additional duration risk.

As of September 23, the two-year Treasury yielded 4.85%, compared with 5.10% for the 10-year and 5.40% for the 30-year.

That means investors would receive only 25 additional basis points for extending from two years to 10 years—and roughly 56 basis points for extending all the way to 30 years.

Those yield pickups appear relatively modest given the significantly greater sensitivity of longer-duration bonds to changes in interest rates.

The Fed may ultimately deliver the relatively mild hiking cycle currently embedded in futures markets. But history suggests that outcome should not be taken for granted.

More importantly, the rise in longer-term yields increasingly reflects forces beyond Fed policy—particularly the higher term premium.

With those structural pressures still in place, and relatively little additional yield available for taking duration risk, our Asset Allocation Committee continues to maintain a short-duration stance in fixed income.

The Federal Reserve changed direction on September 16, raising its target range by a quarter point in its first rate hike since 2023. However, the bigger story is not the 25 basis points. It is that the easing cycle is over, and the burden of proof has flipped. The question now is how far the Fed may ultimately need to go.

Markets expect a mild hiking cycle

For now, investors are expecting a relatively modest move higher in rates. As of September 23, futures markets were pricing in almost two additional quarter‑point hikes by year‑end, and just over four hikes in total through the end of 2027.

For now, investors are expecting a relatively modest move higher in rates.

In other words, markets appear to expect something closer to a midcycle adjustment than a full‑fledged hiking cycle. That could certainly prove correct. But history suggests investors may want to take that assumption with a grain of salt.

Liftoff?

Data as of September 23, 2026.
For illustrative purposes only. Actual outcomes may differ materially from estimates. January 2021 to September 2026, Fed Funds Futures Curves September 2026 to July 2028.
Source: Bloomberg Finance L.P.

History suggests caution

The modern era of Federal Reserve policymaking began in February 1994, when the Fed started announcing rate changes on the day they were made. Since then, there have been six hiking cycles. Only one turned out to be a true mid‑cycle adjustment.

In the other five cases, the federal funds rate ultimately rose at least 175 basis points from where the hiking cycle began. The exception was 1997, when the Fed raised rates only once before reversing course. But even that episode proved temporary. After three subsequent cuts, the Fed began hiking again in 1999—a cycle that ended about a year later when the technology bubble burst.

While the current futures curve may prove accurate, history suggests that once the Fed has started hiking, the endpoint has often been considerably higher than markets initially expected.

Caution may be warranted

(Fig. 2) History vs. the current Fed funds futures curve

Data through September 23, 2026.
36 month change from the outset of each hiking cycle, 1994 to September 2026.
A cycle is one or more hikes with no cut anywhere in between. The start is the date of the first hike.
Source: Bloomberg Finance L.P.

The Fed is only part of the story

More importantly, Fed policy has become a less important driver of longer‑term Treasury yields. Over the two years ended September 23, 2026, the 10‑year U.S. Treasury yield increased from roughly 3.73% to 5.10%—an increase of about 137 basis points.

Only about 72 basis points of that move can be attributed to higher expectations for future Fed policy. The remainder reflects an increase in the term premium—the additional compensation investors demand for holding longer‑term bonds. That premium has risen for a variety of reasons, including greater geopolitical uncertainty, persistent inflation concerns, heavy Treasury issuance, and expectations for rising capital expenditures globally.

Those pressures are unlikely to disappear simply because the Fed ultimately delivers a relatively modest hiking cycle. As a result, even if markets are correct about the path of Fed policy, longer‑term yields could continue to grind higher.

The other story: Rising term premiums

(Fig. 3) 10‑year U.S. Treasury yield components

Stacked area chart shows Treasury yields reflecting Fed expectations and term premium.

Data as of September 23, 2026.
Term premium = The extra compensation investors require to hold longer‑term Treasuries instead of rolling shorter‑term securities.
Source: Bloomberg Finance L.P.

Limited reward for taking duration risk

At the same time, investors currently are receiving relatively little compensation for taking additional duration risk. As of September 23, the two‑year Treasury yielded 4.85%, compared with 5.10% for the 10‑year and 5.40% for the 30‑year. That means investors would receive only 25 additional basis points for extending from two years to 10 years—and roughly 56 basis points for extending all the way to 30 years. Those yield pickups appear relatively modest given the significantly greater sensitivity of longer‑duration bonds to changes in interest rates.

Limited reward for longer duration

(Fig. 4) Yield to maturity of U.S. government bonds

Bar chart shows limited extra yield from extending across longer Treasury maturities.

As of September 23, 2026.
Source: Bloomberg Finance L.P.

Conclusion

The Fed may ultimately deliver the relatively mild hiking cycle currently embedded in futures markets. But history suggests that outcome should not be taken for granted. More importantly, the rise in longer‑term yields increasingly reflects forces beyond Fed policy—particularly the higher term premium. With those structural pressures still in place, and relatively little additional yield available for taking duration risk, our Asset Allocation Committee continues to maintain a short duration stance in fixed income.

The Fed may ultimately deliver the relatively mild hiking cycle currently embedded in futures markets. But history suggests that outcome should not be taken for granted.

Timothy C. Murray, CFA Capital Markets Strategist

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Additional Disclosures

Risks: Fixed‑income securities are subject to credit risk, liquidity risk, call risk, and interest‑rate risk. As interest rates rise, bond prices generally fall.

Term premium: The extra compensation investors require to hold longer‑term Treasuries instead of rolling shorter‑term securities.

Duration risk: The risk that longer‑term bonds may experience greater price swings because they are generally more sensitive to changes in interest rates.

Basis Points: 1 basis point = 0.01 percentage points.

Visit troweprice.com/glossary for definitions of financial terms.

Please see vendor indices for more information, including definitions and source data: troweprice.com/marketdata.

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Information presented has been obtained from sources believed to be reliable, however, we cannot guarantee the accuracy or completeness. The views contained herein are those of the author(s), are as of October 2026, are subject to change, and may differ from the views of other T. Rowe Price Group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

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How far will the Fed go?

Markets expect a mild hiking cycle

Liftoff?

History suggests caution

Caution may be warranted

The Fed is only part of the story

The other story: Rising term premiums

Limited reward for taking duration risk

Limited reward for longer duration

Conclusion

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Are higher interest rates here to stay?

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