First Rate Hike in Three Years — Arta Market Brief, October 2026

Rather than hearing from a single voice, we’re bringing together perspectives from experts across our Investments team, covering investment advisory, private markets and derivatives. The aim is to give you a broader view of what we’re seeing across markets, what we think matters, and how different parts of the investment landscape connect.

1. Introduction - Matt Linker, Head of Investments

Last month we wrote that we expected the Fed to hold in September. It didn't. On 16 September the Committee voted unanimously to raise rates for the first time in three years, and we have updated our thinking accordingly. The more important signal was not the hike itself, but what Chair Warsh said he was watching: he said he was "hard-pressed to describe broad financial conditions as restrictive." In other words, the Fed appears to be judging policy by how easy overall conditions feel, including strong equity markets, rather than by any single inflation reading. That is notable because the inflation detail has been improving, with core CPI at its lowest annualized rate since 2021.

Bond markets repriced sharply. The 10-year Treasury yield reached its highest level since 2007, and at the extremes, markets are now assigning meaningful odds to policy rates rising above their 2023 peak.

Beneath a steady headline index, the picture is less calm. The median S&P 500 stock sits roughly 16% below its 52-week high, the weakest breadth since the dot-com era, and a record share of index members have recently moved in the opposite direction to the index itself. Energy has also shifted: crude oil fell on hopes for Strait of Hormuz flows despite missile strikes on Riyadh, while diesel and jet fuel prices returned to 2022 highs. The pressure has moved from the oil well to the refinery.

With breadth this narrow and a packed calendar of upcoming events, expect sharper moves in individual stocks and sectors than the headline index suggests.

Finally, AI gave markets two very different headlines: calls from industry leaders to slow development, and consumer AI agents reaching mainstream adoption faster than many expected. In the sections that follow, Brandon, Peter and Yekaterina look at what these shifts mean across public markets, private markets and derivatives.

2. Public Markets - Brandon Ho, Head of Investment Advisory

The Federal Reserve raised interest rates in September, the first time they’ve done so in three years. Chair Kevin Warsh pointed to three things that changed since the Fed's last meeting in July: the economy strengthened, the summer's inflation trends did not pass his test, and the geopolitical picture shifted. While he declined to offer forward guidance, he restated the standard he set out at Jackson Hole: the Fed needs to be confident that underlying inflation is returning to target "clearly and at sufficient speed". Historically, a first hike has usually been followed by more - a sentiment echoed by the fact that 16 of 18 Fed officials expect at least one further increase this year.

For members, this is a marked shift from the start of the year, when markets instead expected rate cuts. In the weeks since the decision, strong economic data pushed the 10-year Treasury yield, a reference point for pricing almost every other asset, to its highest level since 2007. Higher yields can weigh on bond prices, raise the bar for equity valuations and make assets that pay no income, such as gold, relatively less appealing, as gold's recent pullback showed.

The AI trade faced its own test in mid-September, when leaders of several major AI developers called for a slower pace of development. Some chipmakers and data centre names fell roughly 5% to 9% in a single session. The selling was short-lived though, the S&P 500 eventually ended that week roughly flat and the Nasdaq edged higher as investors returned.

Following the Fed's September hike, the 10-year yield reached a near two-decade high — a move with implications across asset classes.

The episode shows how quickly sentiment toward AI can shift on headlines, and how quickly it can shift back. Beneath the noise, we continue to see demand across the AI ecosystem of chips, energy and infrastructure, and the build-out appears to be moving forward. Chair Warsh himself described the surge in related capital spending as real. Short-term risks and fluctuations remain, however, and the path to broader AI adoption may not be a straight line, particularly with rates moving higher.

Looking ahead, we are watching whether incoming data, including third-quarter GDP and consumer sentiment, confirms the economy's strength, and whether energy prices ease enough to take pressure off inflation. Third-quarter earnings should show whether AI spending and revenue numbers are holding up. These will all feed into the Fed's October decision.

3. Private Markets - Peter Harano, Head of Private Markets

Last month we noted that private markets tend to reflect change on a lag, and September offered a clear test of that idea. While public markets absorbed the rise in rates within days, private valuations will likely adjust more gradually, with third-quarter reporting likely providing the first meaningful indication of the impact.

Income tends to respond first, as most private credit is floating rate, meaning what lenders earn rises alongside short-term rates. The trade-off is that borrowers now carry a heavier debt-service burden, which places a greater premium on credit selection and on how carefully loans were structured.

Valuations, on the other hand, tend to respond more slowly, as private equity, venture and real estate are all priced against the cost of capital. In venture, the case for the leading AI companies remains intact in our view, though expected timelines for some of the largest anticipated listings have moved later.

Returns will depend less on cheap financing than they did over the previous decade and more on managers who can create value through operations, repositioning and structuring.

Real estate is where rates are felt most directly. Higher long-term yields are likely to put upward pressure on cap rates, though much of that may already be reflected after several years of repricing, and the volatility of rates, as much as their level, has made it harder to transact. Last month we noted renewed interest from value-oriented investors, and while the near-term path may now be slower, our conviction in the asset class over the long run is unchanged. What has changed is the playbook, as returns will depend less on cheap financing than they did over the previous decade and more on managers who can create value through operations, repositioning and structuring.

We are also constructive on hedge funds from here, as greater volatility and dispersion across rates and markets can create a richer opportunity set for strategies able to trade both sides of those dislocations.

Looking ahead, we will be watching the Fed's October decision, quarter-end valuations and whether the most anticipated listings proceed as expected. None of this changes our long-term view of private markets, but it does reinforce the idea that how and with whom you invest matters as much as where.

4. Derivatives - Yekaterina Alferova, Head of Derivatives

Skew rebuilt hard through September, retesting July's highs as rates, oil and the Fed brought demand for tail hedges back in. It's eased since, but the premium for downside protection remains elevated heading into October. Implied vol in the mid-teens doesn't capture that premium - it's priced into skew instead.

The vol term structure tells a similar story. It flattened into mid-month, then re-steepened after the Fed decision, and it's still upward-sloping now: one-month vol sits around 16, three-month around 18, six-month around 20. Near-term calm, more uncertainty priced in further out.

Index-level vol is a useful proxy, but it's one number for an index whose pieces are moving very differently. QQQ calls have remained cheaper than single-name calls this month, and sector performance shows the same divergence - tech up around 7% this month, utilities and small-caps down as rates rose. The index return tells you less than the pieces underneath it.

The near term pricing contained volatility, but skew and the sector divergence both say the calm isn't uniform.

Options traders have been actively adjusting their hedges too, rather than sitting on old ones, and sizable bets placed early in the month on a volatility spike by November suggest some investors are already positioning for a bumpier year-end.

Rates shifted the opportunity set too. The curve flattened into the Fed's September 16 hike to 4%, as short-dated yields rose faster than longer-dated ones, then steepened again as the long end led the late-month selloff - the 10-year's reached 5.26%, the 30-year 5.59%. Higher yields across the curve mean more room to work with on structured-note terms, especially at longer maturities.

The front end is pricing contained vol, but skew and the sector divergence both say the calm isn't uniform. Investors are paying for protection, not for panic.

6. Looking Ahead

The calendar into November is unusually crowded: September’s jobs report, third-quarter earnings, the Fed's 28 October decision and the US midterm elections on 3 November.

US inflation and jobs data may look dovish at first glance, but we are cautious about reading them that way. With the labor force shrinking, the pace of hiring needed to keep unemployment steady is now close to zero, so a soft payrolls number with a stable unemployment rate is not the same signal of weakness it once was. The Fed has also made clear it is focused on inflation outcomes rather than explanations. At the same time, we think some of the most extreme rate scenarios now priced look stretched relative to the data. 

In equities, the AI build-out still looks real, but where the market places its premium has changed. Suppliers to the build-out have become some of the more expensively valued parts of the trade, which makes selection more important than simply owning the theme. The recent selloff in businesses seen as vulnerable to AI agents may also be running ahead of how much spending has actually shifted so far.

With breadth this narrow and a packed calendar of upcoming events, expect sharper moves in individual stocks and sectors than the headline index suggests. For long-term investors, the message is consistent with last month: stay invested, diversify sources of return, check for concentration you did not intend, and let periodic rebalancing, not the latest headline, keep risk aligned with your goals.