The U.S. Federal Reserve raised its benchmark interest rate by 25 basis points on Wednesday, bringing the federal funds target range to 3.75%-4.00%, marking its first rate increase since July 2023 as policymakers seek to contain persistent inflation.
The Federal Open Market Committee (FOMC) approved the hike unanimously in a 12-0 vote at its September 15-16 meeting. While the move was broadly anticipated by financial markets, the Fed’s updated projections delivered a more hawkish message, pointing to the possibility of further tightening and a higher-for-longer interest-rate environment.
The Fed’s latest dot plot showed that 16 of 18 policymakers expect at least one additional rate increase in 2026. Twelve officials projected one more hike, while four saw two additional increases. Only two policymakers expected no further hikes this year.
The median projection for the federal funds rate was raised to 4.1% for both 2026 and 2027, up from 3.8% and 3.6%, respectively, in the June projections. The median rate is then seen declining gradually to 3.9% in 2028 and 3.6% in 2029, remaining above the Fed’s 3.2% longer-run estimate.
Inflation is expected to remain above the Fed’s 2% target for several years. The Fed projected headline PCE inflation at 3.7% in 2026, easing to 2.3% in 2027, 2.1% in 2028 and 2.0% in 2029. Core PCE inflation is projected at 3.4%, 2.5%, 2.2% and 2.0%, respectively.
At the same time, the Fed upgraded its economic outlook. GDP growth is projected at 2.3% in 2026 and 2.4% in 2027, while the unemployment rate is forecast at 4.1% through 2029. The combination of resilient economic growth and persistent inflation gives policymakers room to maintain restrictive monetary policy.
Financial markets responded to the Fed’s higher-for-longer signal, with Treasury yields remaining elevated and the U.S. dollar strengthening, while U.S. equities came under pressure. The 10-year Treasury yield had recently moved above 5%, while the two-year yield also rose following the decision.
The higher-rate outlook could continue to weigh on valuations, particularly for long-duration growth stocks, as elevated bond yields increase the discount rate applied to future earnings.
