The Fed just hiked for the first time since 2023. Here’s what it means for your muni portfolio.
The Signal
The Federal Reserve raised its target rate a quarter point to a range of 3.75% to 4% this week, its first hike since 2023. The move followed a report showing core inflation ran hotter than expected in August, and it came despite President Trump’s continued public calls for lower rates.
At the press conference, Chair Warsh was direct: the committee hiked because the economy has strengthened, inflation trends are failing to improve, and geopolitical risk continues to build, not because markets forced the committee’s hand or any single data point triggered the move. He described the hike as “insurance” against energy shocks broadening into wider inflation, while maintaining that policy remains a step below restrictive. He was equally direct with the White House: Warsh will not be influenced by political pressure, a point we have expected since he took the chair.
Markets, for their part, appear to be exhaling. The 10-year Treasury eased to around 4.94% Wednesday from 5.02% the day before, and munis moved in step. The hike was priced in well before the decision; attention has already turned to what comes next.
Last week, we called a hike with Chair Warsh’s support the “cleanest outcome for the Fed’s credibility.” That is the scenario that played out on September 16, and it sets the terms for the debate now underway over whether one hike ends the story or starts one.
What’s Driving It
The hawkish drift was visible.
Support for a hike had been building inside the Fed for some time. When the committee held rates steady in July, three regional bank presidents dissented in favor of raising them, an unusually public split for an institution that prizes consensus. September’s move looks less like a sudden shift than the committee catching up to where a meaningful minority already stood.
Some are not convinced this is a pattern.
Bloomberg’s economists argue the trade-off behind this hike, and any that follow, is a poor one: it does little to blunt supply-driven inflation shocks while adding risk to financial conditions and the labor market. Their call is that this is the Fed’s only hike in 2026. We are less certain. The Fed’s own dot plot shows sixteen participants penciling in at least one more increase this year, and that gap is worth watching.
Munis are cheap, and getting cheaper.
Ten-year municipal benchmark debt offered roughly 74% of comparable Treasury yields as of Monday, and the broader muni-to-Treasury ratio touched 74.8% on September 10, its highest level since September 2025. Heavy new issuance, fading demand, and a broader fixed-income selloff are colliding at once, leaving some of the cheapest municipal valuations we have seen in a year. Longer-dated, high-grade paper is now yielding around 5.10% or higher, and investors are responding: municipal bond mutual funds took in $45 million in the week ended September 9, a sharp reversal from the prior week’s $947 million outflow. The “magic” 5% yield-to-worst has reemerged; for an investor in the 37% tax bracket, that carries a taxable-equivalent yield of 7.46%, with paper above that level increasingly available.
One credit we continue to avoid.
Fitch revised its outlook on Edison International and Southern California Edison to negative from stable this week, citing California’s stalled wildfire liability reform, while affirming both companies’ issuer default ratings at BBB and F3. We have made it a practice to steer clear of this credit quality, and talk of further ratings pressure reinforces why.
Our Take – Sloppy Markets
The hike is done, and it was not a surprise. What matters now is what it signals about the path ahead, and there we are watching the same tension the market is: a Fed that still sees room for more tightening against a research community that thinks this hike stands alone.
Sixteen Fed officials see at least one more increase this year; Bloomberg sees none. Both readings could prove right depending on how core inflation, energy prices tied to ongoing geopolitical risk, and labor market data evolve over the next two meetings, and those are the three variables we are watching most closely on your behalf.
What has not changed is our view on value. Municipal relative value near a one-year high, combined with yields above 5% on high-grade paper, has historically represented an attractive entry point for tax-sensitive investors, and the current setup looks consistent with that pattern. Credit selection still matters: we continue to avoid names like Edison International and Southern California Edison, where ratings pressure is building rather than easing.
We expect more clarity in the weeks ahead than we have had in months, and we will keep watching the data, and the Fed, closely on your behalf.
Recommendations
Take advantage of current muni valuations
With the muni-to-Treasury ratio near its highest level in a year and high-grade paper yielding north of 5%, this window has historically rewarded disciplined buyers willing to act before valuations normalize.
Watch the gap between the Fed's dot plot and Wall Street's one-and-done call
Sixteen officials see room for another hike this year, while Bloomberg sees none, and that disagreement is likely to drive volatility into the next several data releases. We are prepared to act as it resolves.
Steer clear of credits under ratings pressure
Fitch’s negative outlook on Edison International and Southern California Edison is a reminder that not every muni-adjacent credit belongs in a conservative portfolio.
Let’s Talk
If you would like to discuss any of the above in the context of your portfolio, reach out. This market environment rewards preparation — and that is exactly what we are here to help with.
