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