The Federal Open Market Committee (FOMC) unanimously voted to increase the federal funds rate target range by 25 basis points (bps) to 3.75%–4.00%.
Changes to the FOMC Statement:
- After a significant rewrite in June, the September FOMC statement was mostly unchanged.
- On the economy, activity was still described as expanding at a “solid pace,” despite elevated uncertainty from “geopolitical developments” (i.e. conflict in the Middle East). Job gains were said to have “kept pace with the workforce,” while the unemployment rate has changed little. Consumer spending was characterized as “resilient,” productivity growth as “strong,” and capital investment as “robust.”
- Inflation remained characterized as “elevated,” but the statement's discussion of energy-related inflation pressures shifted notably. The reference to “supply shocks from energy” was removed and replaced with language emphasizing that “today’s policy action will support a timelier return” to the Committee’s 2% inflation goal.
- On the appropriate path for monetary policy, the statement continued to reiterate that “the Committee will deliver price stability”.
- The statement re-affirms the current balance sheet policy to “maintain ample reserves in the banking system”.
Summary of Economic Projections (SEP):
- Investors received updated FOMC participants’ outlooks for employment, growth, and inflation. Relative to June, changes to the economic forecasts were small and on the margin but generally in the direction of stronger growth, higher inflation and lower unemployment. Importantly, for the second consecutive SEP, Federal Reserve (Fed) Chair Warsh did not submit a dot plot or any economic projections.
- The Core Personal Consumption Expenditures (PCE) inflation forecast increased 0.1% to 3.4% for 2026 and remained unchanged at 2.5% for 2027 and 2.1% for 2028. The number of participants who saw upside risks to their core inflation forecast stayed elevated at fifteen out of eighteen members.
- The Committee raised its 2026 and 2027 growth forecasts by 0.1% each to 2.3% and 2.4%, and left its 2028 estimate unchanged at 2.2%. The longer-run growth forecast remained at 2.0%. Notably, no participants viewed growth risks as skewed to the downside, with risks now broadly balanced and five participants seeing risks tilted to the upside.
- The unemployment rate forecast was nudged down to 4.1% and is expected to hold steady over the forecast horizon. The longer-term unemployment rate, however, was unchanged at 4.2%. Out of the eighteen members who submitted forecasts, the number of participants who saw upside risks to their unemployment rate forecast fell from seven to zero, the lowest reading since March 2018.
- The median participant now expects the fed funds rate to hike an additional 25bps ending 2026 at 4.1%, no change to the policy rate in 2027, and rate cuts in 2028 and 2029.
- The median participant now expects the fed funds rate to end 2026 at 4.1%. Sixteen of eighteen participants expect one additional rate hike this year, while four participants project two additional hikes.
- The median participant also shows the fed funds rate unchanged in 2027 at 4.1%, followed by rate cuts in 2028 and 2029 to 3.9% and 3.6%, respectively. The most hawkish participant sees the policy rate at 4.375% in 2026 and 2027, 4.1% in 2028 and 3.875% in 2029. The most dovish participant sees the policy rate at 3.875% in 2026, 3.125% in 2027, and 2.875% in 2028 and 2029.
- The long run dot rose slightly to 3.2%.
Key Quotes from Chair’s Press Conference:
“My judgment some weeks ago was the inflation summer trends weren't passing the test. I have seen very little information since that would make me reverse that decision”
“Why did yields rise from the last FOMC meeting to this? First is economic strength. Part of the reason we have seen over the course of 2026 long-term yields go up is the economy has strengthened. The second reason, the competition for capital. The surge in expenditures which I referenced in my remarks is real, and the so-called hyperscalers are out of the market raising funding, so the competition for capital is real, and it partly explains the increase in yields. The third is geopolitics. The situation, hot spots around the world, are driving long-term yields. It is not simply spot prices of energy, or spot prices for corn or soybeans or wheat, but it is the difference between those spot prices and so-called crack spreads. What that means for products that find their way into a store across the country”
“Market participants and reporters, I think generally over the course of the last decade or so have grown accustomed to waiting somewhat breathlessly on a data-point. That isn't my view. Data-points are noisy. Data-point dependence is a dangerous preoccupation. It is not something that concerns me”
“Markets will come to understand how this Fed makes its decisions, whether it is relevant to them or not. Sometimes the market tries to prejudge our outcomes... but today was our decision”
“As I said at the policy symposium in Jackson Hole, I would be hard-pressed to describe broad financial conditions as restrictive. This view was widely shared by the Committee. We removed a dose of accommodation so that financial and credit conditions would be more consistent with our ultimate objectives”
Our View:
- The Fed hiked the policy rate in line with market expectations. Following Chair Warsh’s Jackson Hole speech, markets have interpreted the Fed as having less tolerance for upside inflation surprises while downside risks to growth and the labor market remain limited. The SEP largely reinforced that view, with upward revisions to inflation and growth forecasts and downward revisions to the unemployment rate outlook. The projections also point to a growing consensus around one additional rate hike in 2026. However, views remain more divided beyond that horizon, with eight participants expecting further hikes in 2027, six expecting rates to remain unchanged, and four anticipating cuts. Complicating the outlook, the Fed’s preferred inflation gauge, core PCE, continues to run meaningfully hotter than Consumer Price Index (CPI) and other trimmed-mean inflation measures. In addition, backward revisions to reflect methodology adjustments are expected to reduce PCE inflation at the end of the month.
- We maintain our base case of continued expansion. Real gross domestic product (GDP) averaged 2% in 2025 and averaged at a similar pace in the first half of 2026. Business investment in sectors such as technology and artificial intelligence (AI) remains robust but a broader capital expenditure (capex) boom outside of tech remains limited. The consumer has remained resilient, buoyed by tax refunds and the wealth effect, but faces headwinds from slowing real income growth, and a re-acceleration in energy costs.
- The 10-year U.S. Treasury yield has risen to 5%, driven primarily by higher real yields, reflecting greater confidence in the economy’s resilience despite elevated oil prices. We expect yields to remain elevated in the near term, as recent data suggest a labor market that remains broadly balanced with fewer downside risks. Inflation is likely to spend longer above target, although the pass-through from higher energy prices remains largely confined to gasoline and airfares.