The Federal Open Market Committee voted unanimously 12-0 to raise the target range for the federal funds rate by 25 basis points, from 3.50%-3.75% to 3.75%-4.00%, marking the first rate hike since July 2023.

The committee's statement indicated that inflation remains elevated, and this action aims to support a faster return to the 2% target, reiterating the committee's commitment to price stability. The Consumer Price Index for August was 3.4% year-on-year, with energy and geopolitical supply shocks being the main sources of price stickiness.

Economic forecasts show that 16 out of 18 committee members expect at least one more rate hike in the remaining two meetings of 2026, with 12 anticipating an additional 25 basis points and 4 expecting two more hikes; participants also revised up growth expectations for the year and lowered unemployment rate forecasts, with the consensus for personal consumption expenditures inflation around 3.7%-3.8%.

Current Chair Waller did not submit a quarterly dot plot, while Powell, although no longer chair, still voted in favor of the rate hike as a committee member. This unanimous vote is the first since May 2025; the previous July meeting had three members advocating for an immediate hike, resulting in a 9-3 vote to maintain rates.

President Trump publicly threatened about 12 days ago that if the Federal Reserve did not lower rates, he would stop trading with over 50 partners that have trade deficits with the U.S., claiming this approach is better than tariffs. The committee not only did not lower rates but instead raised them, widening the gap between the White House and central bank policies.

In market mechanisms, futures had priced in over a 90% probability of the rate hike before it was announced, avoiding a shock from unmet expectations; short-term rates and the dollar were supported by event-driven factors, while long-term rates remained constrained by fiscal and oil price pressures. Beneficiaries include holders of cash and floating-rate assets, as well as inflation hedge positions, while those under pressure include interest-sensitive housing, auto loans, and high-leverage growth stocks; funds are reallocating from duration risk to cash and short-term bonds.

The dot plot indicates that there is still additional tightening space of about 25 to 50 basis points for the year, as written into the committee's majority path, leading to a slight upward revision in market pricing for another hike by the end of the year.

Source: Public Information