Fed hikes rates, keeps focus on price stability

Summary

Impact on rates

Treasury yields moved higher following the announcement and Warsh’s press conference, with the largest moves concentrated at the front end of the curve. Shorter-dated yields rose approximately 8-12 bps, while the 10-year Treasury yield increased by a more modest 3-5 bps.

The larger move at the front end, which is more sensitive to changes in expectations for near-term monetary policy, reflected the Fed’s higher projected policy-rate path and Warsh’s continued emphasis on restoring price stability.

Markets had largely anticipated the rate increase. Heading into the meeting, fed funds futures implied a 92% probability of a 25 bp hike, up from approximately 70% a week earlier following firmer-than-expected August inflation data. The updated projections and Warsh’s comments, however, reinforced the possibility of further tightening.

The median dot now indicates one additional hike this year, bringing the projected total to two hikes in 2026. Twelve officials project two hikes this year, four project three, and two project only one. That represents a notable shift from June, when officials were evenly divided between one hike and no hikes.

Warsh also addressed the broader rise in Treasury yields since the previous meeting. He pointed to a strengthening economy, increased competition for capital amid a surge in capital expenditures, and geopolitical developments as contributing factors. Warsh also said he would be hard pressed to characterize current financial conditions as restrictive, reinforcing the Committee’s willingness to remain focused on inflation despite higher market yields.

Fed projections and forward curves have moved higher throughout the year. The median dot now points to 4.125% at year-end 2026, implying one additional rate hike. The announcement had little impact on the forward curve relative to yesterday, suggesting the move was largely priced in.

Moving forward

The September meeting sharpened the Fed’s focus on inflation. With economic growth remaining solid and the labor market stable, the Committee appears to have room to prioritize restoring price stability.

Warsh emphasized that inflation has remained above target for five years and that underlying inflation has yet to show sufficient improvement. At the same time, the Fed continues to characterize the labor market as strong, with unemployment remaining low and job gains keeping pace with workforce growth. Together with the Committee’s assessment of solid economic activity, those conditions give policymakers greater flexibility to keep policy focused on inflation.

The updated projections reflect that balance. The Fed now expects real GDP growth of 2.3% in 2026, up from 2.2% in June, while its unemployment rate projection declined to 4.1% from 4.3%. At the same time, projected PCE inflation increased to 3.7% from 3.6%, and the projected federal funds rate rose to 4.1% from 3.8%.

Beyond 2026, the median projection shows rates remaining unchanged in 2027 before a cut in 2028, although eight officials project an additional hike in 2027. That dispersion underscores the uncertainty surrounding the policy path beyond this year.

Warsh emphasized that the Committee will assess broader economic trends rather than react to individual data points when determining the appropriate path for policy. The next FOMC meeting is scheduled for October 28, with fed funds futures currently implying roughly a 50% probability of another 25 bp increase.