Markets are expecting approximately 100 basis points, or 1%, of additional tightening over the coming year. The Federal Reserve’s own projections also point to higher rates, even as its median forecast puts the federal funds rate at 4.1% at the end of this year and next year.
The Federal Reserve raised its benchmark interest rate by 0.25 percentage points to 3.75%-4.00% on September 16. The Federal Open Market Committee, the body that sets US monetary policy, approved the move unanimously. It was the first rate increase since July 2023.
Chair Kevin Warsh said the decision reflected inflation that has stayed above the central bank’s 2% target for more than five years. “The plain fact is that inflation is too high, and has been for too long,” he said.
The increase reverses the policy direction followed earlier this year. The Fed had held rates steady from January through July 2026 after a series of reductions in late 2024 and late 2025. The latest decision also defied President Donald Trump, who had called for rates to be cut.
Warsh described the move as a “sober” and “responsible decision”. He said there was “an attitude of optimism” within the Fed leadership, while cautioning that recent data had yet to show a sufficient improvement in price pressures. “Based on this summer's inflation indicators, we cannot judge that the underlying trend has meaningfully improved,” he said.
August’s consumer price index rose 3.4 percent year over year, unchanged from the previous month. The Personal Consumption Expenditures (PCE) price index, the Fed’s preferred measure, reached 4.1 percent in May and stood at 3.7 percent in July. Core PCE, the Fed’s preferred inflation measure, currently stands at 3.3% according to the latest reading.
The rate decision came as broader economic indicators remained comparatively firm. Real gross domestic product growth was 2.1% in the second quarter. The Fed raised its projection for real GDP growth to 2.3% for year-end and 2.4% for the fourth quarter of 2027.
Employment data have also remained solid. The US unemployment rate was 4.1% in August, down from a peak of 4.5% in November of last year. Wage growth increased 3.1% year over year in August.
Fed participants forecast a median federal funds rate of 4.1% at the end of this year. That was 0.3 percentage points above the 3.8% forecast published in June. A small majority said rates could rise further to the 4.25-4.5% range next year.
The median forecast for the benchmark rate at the end of next year was also 4.1%, up 0.5 percentage points from the 3.6% forecast in June. The projections leave the timing and size of future increases uncertain, while indicating that officials see less scope for early reductions than they did previously.
Officials now expect inflation to reach 2 percent in 2029. Three months ago, they had projected it would return to target by 2028. Rate cuts are expected to begin in 2028 and 2029.
The outlook depends on how wage and price pressures develop and whether growth continues at the rates the Fed projects. New shocks or incoming data could alter that path. For now, the committee’s unanimous vote and higher rate forecasts show that the Fed is placing persistent inflation ahead of pressure for immediate cuts.
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