In Brief
- The Fed unanimously voted to increase the Federal Funds target range by 25 bps to 3.75%-4.00%.
- The updated dot plot reflected a more hawkish Committee, with the median participant projecting another rate hike before year-end 2026 and 8 of 18 dot submitters expecting at least one additional rate hike in 2027.
- With the European Central Bank also tightening policy and the Bank of Japan expected to move rates higher, global yields have generally shifted upward.
In line with market expectations, the Federal Reserve (Fed) unanimously voted to increase the Federal Funds target range by 25 bps to 3.75%-4.00%. The decision comes with inflation still stubbornly above target and in the wake of an August jobs report that came in firmer than expected. In a brief statement, the Committee reiterated that today's rate hike would support a return to its 2% inflation target, citing resilient domestic spending and recent job gains as evidence that the economy can withstand tighter policy.
The Committee also updated its Summary of Economic Projections (SEP), including the following revisions:
- Growth for 2026 was revised higher, increasing from 2.2% in the June projections to 2.3%. The growth forecast for 2027 was also revised slightly higher.
- The unemployment rate forecast was revised down from 4.3% to 4.1%, reflecting continued labor market tightness. Forecasts for 2027 and 2028 were also revised to 4.1%.
- Headline and core Personal Consumption Expenditures (PCE) inflation forecasts were revised modestly higher. Headline PCE inflation forecasts for 2026 increased from 3.6% in June to 3.7%, while the core PCE projection rose from 3.3% to 3.4%. Despite modest upward revisions to near-term inflation forecasts, the Committee's 2027 inflation forecast held at 2.3%, while the long-run projection remained firmly anchored at 2.0%.
- Chairman Warsh once again declined to submit his own economic projections. However, the updated dot plot reflected a more hawkish Committee, with the median participant projecting another rate hike before year-end 2026 and 8 of 18 dot submitters expecting at least one additional rate hike in 2027.
Fed Chairman Kevin Warsh also fielded questions during the press conference related to the Fed’s approach to data analysis, central bank independence, and the increasingly K-shaped economy.
The September meeting reinforced the Committee's commitment to returning inflation to target. While the 25 bp rate hike was widely expected, markets remain more hawkish than the Fed dots, pricing in one additional hike by the end of 2026 and two further hikes by the end of 2027.
For fixed income investors, the global policy backdrop remains important. With the European Central Bank also tightening policy and the Bank of Japan expected to move rates higher, global yields have generally shifted upward. Even so, current Treasury yields remain attractive, and ongoing demand from global investors could help limit the rise in longer-term yields despite the Fed's hawkish outlook. For equities, a higher rate environment may create headwinds for some rate-sensitive sectors. However, the meeting is unlikely to significantly alter the outlook for AI-related capital spending, which continues to be driven more by strategic demand and competitive positioning than financing costs. As a result, AI-related investment trends may remain largely intact despite tighter monetary policy.