The Fed raised rates and pencilled in one more increase

The Federal Reserve raised the target range for the federal funds rate by a quarter point to 3.75% to 4% on 16 September, by a 12 to 0 vote. It was the first increase since July 2023, and it came nine months after the Fed’s last cut. The effective federal funds rate, the rate that banks pay each other overnight, went from 3.63% to 3.88% the next day.

The Fed’s own projections point to one more increase before the end of the year. Futures markets now lean the same way for the next meeting, on 28 October.

From cuts to increases

The move reverses part of a long easing. Between September 2024 and December 2025 the Fed cut six times, which took the top of its range from 5.50% to 3.75%. It then left the rate alone at five meetings this year.

Energy turned it around. Consumer prices were 2.4% higher than a year earlier in February. The annual rate reached 4.2% in May and was 3.4% in August. Energy prices did most of the work: they were up 0.5% on the year in February, 23.5% in May and 16.3% in August.

Central banks often look through an oil shock, because it lifts prices once and then fades. The risk is that it spreads to everything else, and there are signs that it has. The core PCE price index, the Fed’s preferred gauge, leaves out food and energy. It rose 3.3% in the year to July, up from 3.0% in the year to February. The headline PCE index rose 3.7%.

A short statement

The statement kept its reasoning short. It said “Inflation remains elevated”, and that the increase “will support a timelier return” to the 2% goal. The last line was blunt: “The Committee will deliver price stability.”

It also sounded confident about growth. Its assessment opened with “Economic activity is expanding at a solid pace”, and it said that “domestic spending has been resilient” and that “the unemployment rate has changed little”. The Fed noted that uncertainty remains elevated “owing, in part, to geopolitical developments”, but it did not say that it would wait for that uncertainty to clear.

One more to come

The projections put the median federal funds rate at 4.1% at the end of 2026. That is a quarter point above the midpoint of the new range, so the median official expects one more increase this year. In June the median was 3.8%. Sixteen of the 18 officials put the rate at 4.125% or higher, and four of them at 4.375%. Only two see no further move.

The median for the end of 2027 is also 4.1%, against 3.6% in June. Officials no longer expect to give the increases back quickly.

Their forecasts explain why. The median official sees PCE inflation at 3.7% this year and core PCE inflation at 3.4%, easing to 2.3% and 2.5% in 2027. Growth is put at 2.3% this year. The unemployment rate is seen at 4.1% at the end of the year, below the 4.3% that officials expected in June. A Fed that expects a firm economy and high inflation has little reason to hold back.

What markets price

The front end of the Treasury curve moved before the Fed did. The 2-year yield rose from 4.17% on 25 August to 4.87% on 24 September, and Treasury’s daily rates put it at 4.92% on Monday 28 September.

Futures now point to a second increase. On 28 September, CME FedWatch put the chance of a quarter-point rise at the October meeting at 70.9%, up from 55.4% a week earlier.

What to watch

The first test is the August report on personal income and outlays, with the PCE price indices, due on 30 September at 14:30 Tirane time. The Fed meets next on 27 and 28 October, and again on 8 and 9 December, when officials publish new projections.