Committed to a Discipline, Not a Decision: The Fed Redraws Neutral

Matt Freund, CFA, Christian Brobst, and Chuck Carmody, CFA

Summary Points

We believe:

• The Fed’s September decision to increase the fed funds rate to 3.75–4.00%—its first increase since 2023—reflects follow-through on inflation-fighting rhetoric and an opportunity to rebuild policy credibility.
• The economy remains resilient, and lower-income households are keeping up their spending, though many are stretching to do so.
• The US economy’s ability to absorb a lingering energy shock, a resumption of student-loan payments, and now higher rates without slowing argues that policy was never as restrictive as assumed, and that the “neutral rate” (r*) sits meaningfully above the 2.5%–3.0% range long assumed by markets.

The Fed had signaled a willingness to hike rates coming into the quarter and finally delivered a 25-basis-point hike at its September meeting. Coming into 2026, the story was fiscal tailwinds, a Fed on an easing path, and a curve steepening on schedule. Unexpected conflict in the Middle East interrupted that story, and by Q3 it was clear the energy shock was not going to have a quick, Gulf War-style resolution. A persistently high oil price, rather than a sharp spike followed by relief, kept inflation from being something the Fed could credibly ignore.

The September hike confirmed market expectations and reinforced the Fed’s inflation-fighting commitment. In our view, the Fed also used the moment to cement its credibility after acknowledging (somewhat belatedly) that inflation ran above target for more than five years. Surprisingly, the vote was unanimous. We believe this shows that the data had strengthened enough to silence the most vocal dissenters.

We believe the more important story is not the hike itself, but what it says about the Warsh Fed framework. By discarding rigid forward guidance, the committee preserved its ability to respond to evidence as it arrives rather than defend a predetermined path. Chairman Warsh framed it as removing “a measure of accommodation”—language that, in our reading, was a direct signal that he views policy as still too loose and that the hike is not a one-off adjustment. That distinction—a discipline, not a decision—is the playbook for how we expect policy to behave into 2027. The Fed cannot produce more oil, build more refineries, or create more workers; supply shocks are not a problem it can solve directly. What it can do is manage aggregate demand so that a temporary supply shock doesn't cascade into broader, entrenched inflation. By that logic, further hikes remain on the table if growth and price data stay firm.

A hawkish September rate hike also reopens the neutral-rate debate in a way that matters for duration positioning. If nominal r* is closer to 3.5%–4.0% than the 2.5%–3.0% range embedded in prior Fed communications, then a policy rate near 4% is no longer considered restrictive—it may simply be near equilibrium. That would explain why consumers, corporations, and capital markets have absorbed a string of supposed shocks (rate hikes, resumed student-loan payments, a permanently higher price level, and now an oil shock) with far less damage than models predicted.

The consumer backdrop remains resilient, though surveys tell a different story. Card spending per household rose 4.5% year-over-year in August (3.7% excluding gasoline), according to Bank of America—well above the pace seen in 2025. More telling, the “K-shaped” divergence in spending has largely closed: discretionary spending grew 5.9% year-over-year for higher-income households versus 5.7% for lower-income households in August, the narrowest gap since January 2024. Notably, spending growth has been concentrated in discretionary categories like restaurants, travel, and hobbies—hardly the profile of a consumer unable to afford nonessential purchases. Credit card utilization among revolvers has normalized to near pre-pandemic levels.

Additionally, lower- and middle-income households across every age cohort still hold inflation-adjusted deposit balances above 2019 levels, even after absorbing roughly 28% of cumulative inflation since then (and managing against shocks). Consumers have lived through a genuine price-level shock across groceries, housing, and other everyday costs. Nominal pay increases don't always translate into a felt sense of forward progress when the price level itself never retraces. Households are still saving, but the personal savings rate has been declining, according to publicly available data. The bottom-of-the-K consumer is running harder just to stay in place—still solvent and still spending but increasingly seeking value through down-trades and discounts.

Corporate credit entered the hike from a position of strength, although performance has bifurcated by rating. We are watching that dispersion closely. High-yield spreads trended wider at the tail end of the quarter, and leverage remains contained within norms, but that headline stability masks a growing split. CCC-rated credits have significantly underperformed both the BB- and B-rated tiers. Defaults stayed below long-term averages, with loan defaults continuing to improve. The risk we're monitoring is whether higher-quality credits can withstand the softening technicals as supply remains elevated. For now, dispersion rather than broad-based weakness is the more accurate read, which is consistent with the up-in-quality bias our team has maintained across our portfolio suite.

Positioning Implications

The combination of a hawkish confirmation and a higher assumed neutral rate leads us to maintain a defensive rate posture across our funds. Calamos Short-Term Bond Fund and Calamos High Income Opportunities Fund maintain their short-duration bias versus peers, reflecting the possibility of tighter Fed policy. Calamos Total Return Bond Fund remains closer to neutral versus both benchmark and peers, although the fund’s mortgage overweight, established in 2025, has been a headwind this year and is one we continue to evaluate as the rate backdrop shifts.

Calamos High Income Opportunities Fund continues to favor up-in-quality credits given the dispersion we are watching at the bottom of the ratings spectrum. The team used the stable spread environment as an opportunity to selectively add where relative value has improved rather than chase beta into an uncertain rate path.