Fed approves interest rate hike, signals one more to come this year

• The FOMC's dot plot shows 16 of 18 participants expect another rate hike this year, with four seeing two more as possible, though no increases are projected for subsequent years through at least 2027.
• The Fed raised its 2026 inflation forecasts to 3.7% for headline PCE and 3.4% for core PCE, and doesn't expect to reach its 2% target until 2029.
• Treasury yields and borrowing costs have surged in anticipation, with the 10-year note up a quarter point since late August and 30-year mortgage rates climbing to 7.19%.

Summary: Fed Raises Rates, Signals Additional Hike in 2026

Key Decision:

The Federal Reserve unanimously approved a 25 basis point interest rate increase, raising the federal funds rate to 3.75%-4%. This marks the Fed's first rate hike since July 2023, ending a year-long pause in monetary tightening.

Forward Guidance:

Updated projections show 16 of 18 FOMC participants expect one additional rate hike later this year, with four officials anticipating two more increases. No further hikes are projected beyond 2026, with rate cuts expected beginning in 2028.

Inflation Outlook:

The Fed raised its inflation projections for 2026, now forecasting headline PCE at 3.7% and core PCE at 3.4%—both 0.1 percentage point higher than June estimates. The central bank doesn't expect to reach its 2% inflation target until 2029, though significant improvement is anticipated in 2027 (2.3% headline, 2.5% core).

Rationale:

The unusual policy shift stems from concerns about elevated oil prices linked to conflict with Iran, lingering tariff impacts, and potential AI-driven inflation. Officials fear prolonged energy price increases could raise inflation expectations and spread throughout the economy. The Fed also lowered its unemployment forecast to 4.1%, reflecting labor market stability.

Market Impact:

Markets had priced in over 90% probability of the hike. Treasury yields surged, with the 10-year note up 0.25 percentage points since late August and one full percentage point since February. The 30-year mortgage rate jumped to 7.19%, up 38 basis points post-Jackson Hole and over one percentage point year-over-year.

Chairman Kevin Warsh's recent hawkish messaging catalyzed the policy reversal, with policymakers citing lessons from the "transitory" inflation misjudgment during the pandemic.