Hedging Against Volatility – Feb. 9, 2026
Current economic uncertainty makes it challenging to predict rates, whether short-term or long-term, says J.P. Morgan
The month of January ended with two headline-making actions related to the Federal Reserve: the nation’s central bank maintained the federal funds rate at its current level, signaling a pause to rate reductions; and, two days later, President Trump nominated Kevin Warsh to succeed Chair Jerome Powell. Assuming he’s confirmed, Warsh may take monetary policy in a different direction than Powell has maintained.
That doesn’t mean policy will be shaped by the White House, though. “We expect the Fed to remain independent in its decision-making and focused on the incoming data around inflation and labor markets,” said Ginger Chambless, head of research for commercial banking at J.P. Morgan.
Chambless and her J.P. Morgan colleague Mike Kraft, commercial real estate treasurer for commercial banking, parsed the Warsh nomination and the possible outlook for rates in an article titled “Navigating interest rate uncertainty.” Both made the point that factors beyond the decisions of the Federal Open Market Committee shape that outlook.
Among those factors is “the on-again, off-again status of tariffs,” Kraft said. This created a backdrop of “uncertainty and chaos” in 2025 for a bond market that isn’t comfortable with unpredictability. The specter of new tariffs, even after trade agreements have been reached, has reintroduced that element of uncertainty, he added.
Looking ahead, Kraft said Warsh’s track record as an inflation hawk during his 2006-2011 stint at the Fed “raises additional uncertainty with regard to his possible stance in the longer term. He is also known to view the use of the Fed’s $6-trillion balance sheet as a management tool with disfavor. Any effort on his part to reduce the balance sheet could bump up longer-term rates.”
The impact of actual or perceived inflation is felt most acutely in the realm of medium- and long-term Treasury yields, and uncertainty regarding such perceptions can result in volatility, the article points out. Accordingly, market volatility and economic uncertainty can influence interest rates in both directions.
“Increased uncertainty often leads investors to seek safer assets, including U.S. Treasuries, which can push rates lower,” said Chambless. “Central banks may cut policy rates to support growth if the economic outlook deteriorates in response to uncertainty.
“Alternatively, persistent market swings can prompt lenders and investors to demand higher returns for added risk, potentially driving rates higher,” she continued. “The net effect depends on how markets and policymakers respond to evolving conditions.”
Kraft noted a wide disparity among economists when it comes to the outlook for the year ahead. “Even setting aside uncertainty arising from the American political scene, unexpected outside factors—the recent selloff in Japanese bonds, or regional tensions, or oil prices—may grab headlines from time to time and influence the course of events.”
More specifically, the impact of tariffs on consumers and producers—relatively muted in 2025 as importers absorbed the costs—could mean higher prices in 2026, causing measures of inflation to rise. “Higher inflation would likely result in stable to higher interest rates, as the FOMC might deem it appropriate to stay on pause for longer,” Chambless said.
Higher-for-longer interest rates could keep the environment for CRE somewhat challenging, but to varying degrees, according to J.P. Morgan. “Each local market and asset class will face its own unique dynamics depending on population trends, employment trends, and supply and demand,” said Chambless.
Real estate investors may want to hedge interest rates amid the ongoing uncertainty, the bank suggested. Before doing so, they should understand their business’ cash flow, assess the interest rate sensitivity of their revenues and expenses, and evaluate the economic factors that influence interest rates.