Overview 

The defining theme of the fourth quarter is the Federal Reserve's renewed focus on inflation. While economic growth and employment have remained stronger than expected, policymakers continue to signal that bringing inflation back to their long-term target remains a top priority. As a result, consumers and businesses continue to navigate a higher-rate environment even as inflation gradually cools.

Interest Rates & the Federal Reserve

September was a difficult month for fixed income markets. Persistent inflation pressures prompted the Federal Reserve to raise its benchmark interest rate by 0.25% to a target range of 3.75% to 4.00%, the first Fed Funds rate increase in more than three years.

The Fed's latest projections indicate that policymakers remain focused on controlling inflation and 16 of 18 Fed members forecast an additional rate increase in 2026 before holding rates flat in 2027, underscoring the Fed's commitment to bringing inflation back to their 2% target.

For members, this means borrowing costs may remain elevated for the foreseeable future. Mortgage rates, auto loans, credit cards, and other lending products will continue to reflect a higher-rate environment. On the positive side, savers can expect to benefit from higher yields on deposit products.

Growth, Jobs & Markets

The labor market remains one of the strongest parts of the economy. National unemployment held steady at 4.1% in August, while employers added significantly more jobs than economists expected. Stronger-than-expected job growth suggests the labor market remains resilient despite higher interest rates and energy price uncertainty.

Locally, San Diego's unemployment rate increased to 4.9% in August, up from 3.9% earlier in the year. While that increase bears watching, labor market conditions remain generally healthy, with the region continuing to demonstrate resilience and overall economic stability.

Economic growth has also shown surprising strength. The final reading of second-quarter GDP was revised higher to 2.2%, up from the prior estimate of 1.5%. Consumer spending accounted for much of the improvement, with stronger activity across both goods and services categories. Business fixed investment was also revised meaningfully higher, reflecting continued capital spending and ongoing investment in data center infrastructure and technology-related projects.

Equity markets experienced some volatility during the quarter, though year-to-date performance remains positive across major indices. Markets continue to balance optimism around economic growth with uncertainty surrounding inflation and future interest rate decisions.

Inflation

Inflation remains a key focus for households, businesses, and policymakers, though recent data has been encouraging, albeit surprising considering gas costs.

After the Bureau of Labor Statistics (BLS) accounted for planned revisions and methodological updates, the Fed’s preferred inflation gauge, core PCE, which excludes food and energy prices, fell 30 bps to +3.0% year-over-year. In San Diego, the BLS reported July CPI inflation at +2.7% year-over-year growth, below the national run-rate.

While inflation has cooled considerably from peak levels, many households continue to feel pressure from higher prices that have accumulated over the past several years. Everyday expenses such as housing, insurance, utilities, and other essential costs have increased dramatically compared with pre-pandemic levels.

Consumers & Housing

Consumer sentiment weakened somewhat during the quarter as many households continued to express concerns about inflation and the broader economic outlook. Despite those concerns, spending activity remained relatively healthy. Retail spending rebounded in recent months, supported by continued expenditures on services and everyday purchases.

Housing affordability remains one of the clearest challenges facing many prospective buyers. National home prices increased modestly compared with a year ago, while San Diego home prices were up just over 1%. Higher borrowing costs continue to limit affordability and have contributed to slower home price growth across many markets.

Bottom Line

As we head into the final months of 2026, the economic backdrop remains broadly positive, though not without challenges. The labor market continues to show strength, inflation has moderated, and economic growth has exceeded expectations. However, the Federal Reserve's latest rate increase reinforces that policymakers remain focused on returning inflation to their long-term target. For consumers, that likely means borrowing costs will remain elevated for some time, even as inflation pressures gradually ease.

If you have questions about your finances, financial goals, or next steps, our team is always here as a trusted resource for our members. Explore our financial wellness resources or connect with our team to learn more.