Dot Plot Indicates One More Rate Hike by the Fed This Year
The Federal Reserve has just raised the target range for the federal funds rate by 25 basis points to 3.75% to 4.00%, marking the first rate hike of 2023, passed with a vote of 12 to 0. The dot plot shows that out of 18 officials who submitted forecasts, 16 expect at least one more hike this year, with the median year-end rate revised up from 3.8% in June to 4.1%.
The next meeting is scheduled for October 27-28. Futures and prediction markets are not consistent on pricing a 25 basis point hike at this meeting: immediately after the announcement, futures indicated about a 49% probability, which then fluctuated between 45% and 56% across various platforms, making it nearly a coin toss between holding steady and hiking; the market is more certain about another move this year, with the probability for the December meeting significantly higher than for October. Some analysts suggest that the proximity of the midterm elections in October makes it more likely that the Fed will hold off.
Chairman Kevin Warsh stated at the press conference that inflation remains too high and persistent, and this action is aimed at returning to the 2% target more quickly. Economic forecasts have revised the median PCE inflation for 2026 up to 3.7%, core PCE to 3.4%, the unemployment rate down to 4.1%, and growth up to 2.3%. The long-term neutral rate has slightly increased from 3.1% to 3.2%, and the timeline for inflation to return to 2% has been pushed back to around 2029.
This round of price pressures is described by officials more as resilience in domestic spending rather than just a one-time supply shock, with factors including import tariffs, energy prices, and capital expenditures in artificial intelligence. The European Central Bank raised rates last week, and the Bank of Japan is also expected to tighten in sync. The yield on the two-year U.S. Treasury rose to about 4.74% after the decision.
Trump has publicly called for a rate cut, which is contrary to the White House's position. Warsh has not submitted a personal dot plot since taking office, and there were three members advocating for an immediate hike in July, which shifted to unanimous action in September.
Mechanically, this indicates that "one more hike this year" is written into the dot plot, but the timing is not locked in: what is being sold is the certainty of a hike in October, while what is being bought is the year-end path of 4.1%. Funds are shifting from duration and growth stocks to short-end rates and inflation-protected assets; beneficiaries are banks that can still expand net interest margins, while high-valuation growth stocks, housing mortgages, and already leveraged franchise and treasury assets are under pressure.
The dot plot does not equate to the decision, as employment and price data still need to be digested before the October meeting, with the September PCE release closely preceding the October meeting window.
Source: Public Information
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Since Warsh took over, the committee has shifted from a "tolerant of overshoot" stance to a "zero tolerance for persistently high inflation" approach. In July, three members opposed holding steady, and by September, it became a unanimous rate hike, indicating that internal debates have concluded, leaving only the calendar. The dot plot raises the year-end median to 4.1%, signaling to the market that this is not a one-off statement, but an upward revision of both the neutral rate and the timeline for inflation return. Tariffs, energy, and AI spending have reframed supply shocks as demand resilience, with interest rate tools being re-emphasized as the main brake.
The capital path is to price the short end first, then determine whether the long end believes in "hiking and then stopping." The two-year yield follows the federal funds rate, while the ten-year yield will depend on whether it truly stops at 4.1% in 2027. Banks benefit from higher policy rates expanding net interest margins, while real estate and franchisees bear the burden of rising floating liabilities. The White House wants rate cuts, while the central bank seeks hikes; political premiums will introduce volatility but will not change the path already outlined in the dot plot.
In comparison to Volcker's continuous rate hikes post-1979 to rebuild credibility, and Powell's rapid rate increases after changing his stance on "transitory inflation" in 2022-2023, the current phase is about controlling inflation expectations, not initiating a decade of tightening: most officials are only giving one more 25 basis point hike, with the dot plot still stopping at 4.1% in 2027.
This reflects a shift in regulatory and policy pricing power back to the central bank's reaction function from the electoral cycle. The mechanism is that the midterm elections limit action in October, but do not constrain December and the dot plot; the market treats October as a coin toss while giving a higher probability to year-end, effectively separating the political calendar from the inflation calendar.
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The dot plot outlines the path, while the meeting only specifies the timing.
Elections can delay rate hikes, but cannot delay the median.
After changing the inflation narrative, the first rate hike is rarely the last.