Zacks Investment Management

In this week’s Steady Investor, we examine three developments shaping the market landscape and what they could mean for investors, including:

• The Fed resumes rate hikes
• Treasury yields cross 5%
• Canada deepens European trade ties

The Fed Raises Rates in a Hawkish Turn, Following August’s Inflation Reading – The Federal Reserve raised interest rates by a quarter percentage point this week, lifting the federal funds target range to 3.75% – 4.00% in its first hike since 2023. By the time the meeting was set to take place, the market was pricing in an 80+% chance of a hike, so there was effectively no surprise power in the decision—which may help explain why stocks reacted relatively modestly. The Fed’s decision followed an August inflation report that offered evidence for both sides of the Fed debate. Headline CPI held at 3.4% year-over-year and rose 0.4% for the month, with much of the pressure coming from energy. Energy prices were up 16.3% from a year earlier, including a 27.4% increase in gasoline and a 52% jump in fuel oil.Underneath that volatility, however, inflation continued to moderate. Core CPI, which excludes food and energy, eased to 2.4% year over year, its lowest rate in five years.¹

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Core CPI (ex. Food and Energy) Has Been Largely Trending in the Right Direction

Source: Federal Reserve Bank of St. Louis³

In our view, core CPI argues for leaving rates unchanged, as we’ve seen before that the energy factor can swing both ways quickly. Nevertheless, 16 of 18 Fed officials now see at least one additional rate increase this year, including 12 who project exactly one more quarter-point hike.We have argued before that one or two quarter-point hikes are unlikely to transform financial conditions on their own, and if anything will steepen the yield curve even more—which could serve as a boon to credit.

Is 5% Really a Tipping Point for Treasury Yields? The 10-year Treasury yield crossed 5% this week, briefly reaching 5.041%, its highest level since 2007. News headlines jumped on this development and signaled caution for consumers and businesses, as the 10-year yield influences borrowing costs across the economy, including mortgages, corporate debt and other long-term loans.But we think investors should be careful about treating 5% as a meaningful threshold. At the end of the day, 5% is a round number but it isn’t an economic boundary. In fact, the 10-year Treasury yield averaged roughly 5.8% from 1990 through 2007, before the unusually low-rate environment that followed the financial crisis. In our view, it’s not the level of rates that matters as much as the rate of change. The key issue is what drives yields from here. If they keep rising because inflation expectations are deteriorating, that would be more concerning. If they remain elevated because the economy is growing and credit demand is healthy, the signal is different.⁴

Canada Looks to Deepen Its Economic Ties With Europe Canada and the European Union are exploring a much closer economic relationship, with European Commission President Ursula von der Leyen proposing that Canada eventually become the EU’s first “associate member.” The concept is still undefined, but officials have discussed deeper cooperation in areas including energy, critical minerals, defense manufacturing, AI, digital trade, and advanced technology. Importantly, the two sides are not starting from scratch. Their existing free-trade agreement, CETA, has been provisionally applied since 2017. Since then, bilateral goods trade has grown roughly 76%, reaching 81.5 billion euros in 2025, while services trade has risen more than 90%. That provides some useful context for the “associate membership” headlines. A new framework would likely take considerable time to define and approve, and even CETA still has not completed ratification across all EU member states. So any near-term economic impact may be limited. But the broader trade trend is interesting. Canada is already diversifying: in July, exports to countries other than the U.S. reached a record C$25.6 billion and represented 33.7% of total exports. Still, the U.S. remains by far Canada’s largest market; more than 70% of Canadian merchandise exports went there in 2025. For investors, the takeaway is that highly publicized trade disputes do not necessarily mean global commerce is becoming less connected. Canada is actively building additional trading relationships, even as its deep economic ties with the U.S. remain difficult to replicate.⁵

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• The importance of flexible portfolio allocation
• Why keeping some liquid assets can potentially help you preserve more wealth
• Understanding your risk tolerance in case of a market downturn
• Plus, more strategies to help you protect your retirement assets

If you’re wondering whether your retirement plan is built to withstand the years ahead, How Solid Is Your Retirement Strategy?⁶ is a good place to start.

Disclosure