The Federal Reserve has reopened a part of the macro cycle that many investors had begun to treat as closed. On September 16, the Federal Open Market Committee unanimously raised the federal funds target range by 25 basis points to 3.75% to 4.00%, its first increase since 2023. The decision matters less because of the size of the move than because of what it says about the policy reaction function. Inflation has remained sufficiently persistent for the Fed to reverse direction after the easing that began in 2024 and continued through 2025, while updated projections indicate that another increase this year remains possible.

For private equity, this is a material change in the macro backdrop. The central question is no longer simply how quickly rates fall. Investors now need to consider a wider distribution of outcomes in which policy remains restrictive for longer, and potentially becomes more restrictive if inflation fails to converge toward target. That affects acquisition financing, refinancing assumptions, exit multiples, portfolio company interest expense, and ultimately the discount rates used to value long duration cash flows.

The first chart captures how unusual the current transition is. The upper bound of the federal funds range moved from near zero after the pandemic to more than 5% during the inflation tightening cycle, then declined through 2024 and 2025 before rising again to 4.00%. That sequence matters because private markets had already spent much of the past two years adjusting to the expectation that the peak in monetary restriction was behind them. The latest decision complicates that assumption.

The Fed has been explicit about the reason. Inflation remains above its 2% objective, and the latest articles provided put headline inflation at 3.4% in August. The renewed pressure is closely linked to the energy shock associated with the war with Iran. Oil prices have risen sharply, gasoline prices are reported to have increased by more than 45% since the conflict began, and higher energy costs are feeding into transportation, production, and household expenses.

The distinction between an energy shock and generalized inflation is important. The Federal Reserve cannot directly lower the price of oil, but it can respond if higher energy costs begin to affect inflation expectations, wage setting, service prices, and broader pricing behavior. Chair Kevin Warsh made that distinction clearly. The policy objective is not to offset every increase in an individual price, but to prevent an initial shock from becoming embedded across the economy.

For investors, that means oil has become a monetary policy variable again. If the conflict continues to constrain energy supply and keeps prices elevated, the Fed may face a more difficult tradeoff between inflation control and financial conditions. A temporary increase in energy prices would not necessarily justify a sustained tightening cycle. A persistent increase that broadens into underlying inflation is a different problem.

The second chart shows why the direction of travel matters. The Fed delivered a sequence of large increases during 2022 and 2023, followed by cuts in 2024 and 2025. The latest 25 basis point increase breaks that easing sequence. It does not imply a return to the pace of tightening seen in 2022, but it does increase uncertainty around the terminal rate and the path of borrowing costs.

That uncertainty is already relevant across the yield curve. The source material notes that Treasury yields had risen substantially before the meeting, with the 10 year yield near its highest level since 2007, while rate expectations had also pushed borrowing costs higher. For leveraged transactions, the transmission is straightforward. A higher risk free rate raises debt service, reduces the amount of leverage a given cash flow can support, and places pressure on valuations unless earnings growth offsets the increase in the discount rate. The Fed can manage the implementation of monetary policy through its reserve framework, repo operations, and other open market tools, but those mechanisms are designed to keep the policy rate within its target range. They do not remove the economic effect of a tighter stance.

There is also a broader institutional question. In my LinkedIn post, I framed monetary and fiscal policy as a repeated game. Pedro Dal Bó's work on infinitely repeated games provides a useful lens because the decisions of fiscal and monetary authorities are not isolated. Each actor knows that current policy changes the environment in which the other will make its next decision. Fiscal expansion can affect demand, government borrowing, and financial conditions. Monetary policy then responds to the inflation and growth consequences of that environment. Energy shocks, debt issuance, and political pressure complicate the interaction further.

The practical implication is that cooperation does not require accommodation. The Fed and the Administration operate with different objectives and constraints, and central bank credibility depends on maintaining the inflation mandate even when tighter policy is politically inconvenient. At the same time, fiscal authorities cannot treat monetary conditions as external to their own decisions. Persistent deficits, additional borrowing, and expansionary fiscal policy can affect the very inflation and interest rate environment to which the Fed must respond.

For private markets, the most important next transmission channel may be the US dollar. If investors continue to increase the probability of further Fed tightening while geopolitical tensions sustain energy prices, US yields could remain relatively attractive. That would strengthen the incentive to hold dollar denominated assets, particularly if uncertainty remains elevated elsewhere.

A stronger dollar would tighten financial conditions outside the United States through several channels. Emerging economies and companies with dollar liabilities would face a higher local currency cost of servicing that debt. Domestic central banks could face pressure to maintain tighter policy to limit currency depreciation and imported inflation. External financing could also become more expensive precisely when weaker growth and higher energy costs are already putting pressure on local economies.

The historical comparison is useful because it shows how quickly capital can move when global risk appetite changes. During the COVID shock and the Chinese stock market correction, cumulative emerging market outflows approached or exceeded $35 billion within roughly three months. The Taper Tantrum produced outflows of around $20 billion, while the Global Financial Crisis generated a smaller but still significant decline over the period shown.

Those episodes had different causes, so the chart should not be read as a forecast for the current environment. The relevant point is that emerging market flows can reverse rapidly when investors simultaneously reassess growth, risk, interest rates, and currency exposure. If the probability of further Fed tightening continues to rise, while the war keeps energy prices elevated and inflation pressure persistent, a stronger dollar could encourage additional capital to migrate toward US assets.

For private equity, the effect would not appear as an immediate mark to market shock in the same way it does in public markets, but the economic transmission would still be real. Currency translation, higher refinancing costs, weaker domestic demand, and tighter local credit conditions can all affect portfolio company cash flows. Emerging market assets with dollar debt or meaningful energy exposure would deserve particular attention.

The Fed's latest move therefore matters because it widens the macro distribution that private market investors need to underwrite. Rates may still fall over time, but the path is no longer one directional. Persistent energy inflation, geopolitical uncertainty, fiscal pressure, and another potential rate increase have reintroduced policy volatility into the base case.

For PE and M and A professionals, the key issue is not whether 25 basis points changes a deal model by itself. It is whether the combination of higher US rates, elevated energy prices, and a potentially stronger dollar changes the relative price of capital across markets. If it does, the next phase of the cycle may be defined as much by where capital moves as by where the Fed sets rates.

BBC. (2026). US interest rates raised for first time in three years. https://www.bbc.com/news/articles/cw4gmlyvj422o 

Board of Governors of the Federal Reserve System. (2026). Open Market Operations. https://www.federalreserve.gov/monetarypolicy/openmarket.htm 

Board of Governors of the Federal Reserve System (US), Federal Funds Target Range - Upper Limit [DFEDTARU], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DFEDTARU, September 18, 2026.

CNBC. (2026). Fed approves interest rate hike, signals one more to come this year. https://www.cnbc.com/2026/09/16/fed-rate-decision-september-2026.html 

Federal Reserve Bank of New York. (2026). Effective Federal Funds Rate. https://www.newyorkfed.org/markets/reference-rates/effr 

Gaston Brizuela Bosio, LinkedIn Post. (2026). https://www.linkedin.com/feed/update/urn:li:activity:7506405925596090368/ 

NBC. (2026). Fed raises interest rates for first time since 2023, defying Trump as inflation mounts. https://www.nbcnews.com/business/economy/fed-raises-rates-defying-trump-rcna598148