Fed Hikes After Extended Pause, Signals More Tightening Ahead  

• The Federal Open Market Committee (FOMC) raised the policy rate by 25 basis points (bps), lifting the target range to 3.75%–4.0%. The move followed five consecutive meetings where the FOMC held rates steady.
• The post-meeting statement remained terse at 130 words. Despite elevated uncertainty, the Committee still characterized economic activity as expanding at solid pace, as domestic demand has remained resilient.
• Inflation is still seen as “elevated” and today’s decision was justified in supporting a “timelier return to the Committee’s 2% goal”.
• The FOMC also released a revised set of economic forecasts, known as the “Summary of Economic Projections” (SEP). The SEP represents the median of the individual forecasts submitted by each of the FOMC participants. Relative to the June update:
  • The median projection for real GDP growth – as measured on Q4/Q4 basis – was upgraded to 2.3% (previously 2.2%) in 2026 and 2.4% (previously 2.3%) in 2027. The long-term outlook was maintained at 2.0%.
  • The median year-end unemployment forecast for 2026, 2027 and 2028 were nudged lower to 4.1% (previously 4.3% in 2026/27 and 4.2% in 2028). This is a tick below the median longer-term view of 4.2%.
  • Core PCE inflation – the Fed’s preferred inflation gauge – was raised to 3.4% (previously 3.3%) for 2026 while 2027 was unchanged at 2.5%.
  • Lastly, the median projection for the federal funds rate was raised to 4.1% (previously 3.8%) in 2026 – suggesting the potential for another rate hike by year-end. 2027 was raised from 3.6% to 4.1%, while 2028 falls to 3.9%, or 50 bps above the June projection.
• All twelve FOMC members voted in favor of today’s decision.

Key Implications

• Today’s decision was largely anticipated following last week’s hotter-than-expected CPI report and the recent rise in oil prices. Holding rates steady risked undermining the Fed’s commitment to returning price stability, potentially pushing longer-term Treasury yields even higher. Instead, the rate hike and hawkish shift in the dot plot provided some reassurance to market participants, leading to a modest flattening in the yield curve.
• The question now is how many more hikes from here? A “one and done” approach seems unlikely, simply because it would be inconsequential from both an economic growth and inflation fighting standpoint. But we would also argue that current Fed futures pricing of nearly three additional hikes over the next year is overstated. Delivering on one more quarter-point hike at its next meeting would largely undo last year’s insurance cuts and move the policy stance into a slightly more restrictive setting. While 50 bps of tightening may not seem like much, the real policy rate will climb by another 75 bps through Q1-2027 alongside the expected easing in inflationary pressures. Should this materialize, it would argue for a relatively quick policy reversal in H2-2027.