Fed Raises Rates 25 Basis Points, Signals Another Hike

The Federal Reserve approved a 25-basis-point rate increase on Wednesday, lifting its target range to 3.75%-4%, as most officials projected that another hike could follow later this year.

The Federal Open Market Committee voted 12-0 to raise its key interest rate by a quarter percentage point, marking the Fed’s first increase in more than three years. The committee had kept rates unchanged throughout the year before sentiment shifted toward an increase in late August.

Markets had priced in a better than 90% chance of the move, though there had been discussion about possible dissents. Persistently high inflation readings and statements from Chairman Kevin Warsh a few weeks earlier had convinced Wall Street that the Fed would approve its first rate increase since July 2023.

Fed rate decision and key details

• The FOMC voted 12-0 to increase the key interest rate.
• The quarter-percentage-point move lifted the overnight funds rate to a target range of 3.75%-4%.
• Sixteen of 18 participants expected another hike, with four seeing two more as possible.
• The committee projected headline inflation of 3.7% and core inflation of 3.4% this year.
• The unemployment rate outlook was lowered to 4.1% from the June projection.

“Inflation remains elevated,” the committee said in its brief post-meeting statement. “Today’s policy action will support a timelier return to the Committee’s 2 percent goal. The Committee will deliver price stability.”

Officials indicate another rate hike is possible

Updated projections released Wednesday showed that a strong majority of officials believe another hike is possible later this year. The dot plot indicated that 16 of the 18 participants expected another increase, including four who saw two more as possible, while two expected the committee to stop after one hike.

Warsh has chosen not to submit a dot since taking the chairman position. Officials penciled in no increases for subsequent years, with one cut indicated for 2028 and at least one for 2029.

The Fed rarely moves only once, as policymakers generally avoid incremental action when they believe inflation is too high and requires elevated rates, or when weak growth calls for lower rates to support demand.

Inflation projections move higher

Officials raised their inflation expectations for this year. They projected the headline personal consumption expenditures price index at 3.7% and the core measure excluding food and energy at 3.4%, both 0.1 percentage point above the June update.

The Fed does not expect inflation to reach its target until 2029. It projects both measures will fall sharply in 2027, with headline inflation at 2.3% and core inflation at 2.5%.

The rationale for the increase was unusual because the Fed generally looks through inflation tied to higher fuel costs from the Iran war and the lingering effects of tariffs. Officials have recently weighed the cost of continuing to look through those price increases, particularly as the labor market stabilizes.

The committee lowered its unemployment rate outlook to 4.1%, down 0.2 percentage point from June. Policymakers are concerned that prolonged energy price increases could lift inflation expectations and spread through the economy, while economists also view expanded artificial intelligence investment as a potential inflationary factor.

The earlier “transitory” inflation episode also remains fresh in policymakers’ minds. In July, three FOMC members voted against holding rates steady and instead preferred a quarter-point increase.