Fed raises rates for first time in 3 years, 2 months; signals one more hike this year
The Fed said on Sept. 16 local time that, following a two-day FOMC meeting in Washington, D.C., all 12 voting members agreed to raise the benchmark rate by 0.25 percentage point. That puts the U.S. benchmark rate at 3.75%-4.00%, making the upper bound 1.00 percentage point higher than Korea's 3.00%.
It was the Fed's first rate increase since July 2023, three years and two months ago. In the interim, the Fed cut rates in September, November and December 2024 and again in September, October and December last year. It then held rates steady five consecutive times this year.
In its statement, the Fed said "economic uncertainty stems from geopolitical change," acknowledging that the rate increase was partly driven by the rise in oil prices tied to the war with Iran. The Fed added that "job gains have kept pace with the supply of labor and the unemployment rate has changed little, while inflation remains elevated," explaining that "this action will contribute to the timely achievement of the 2% inflation objective." Oil prices have indeed topped $100 a barrel as the Middle East front widened from the Strait of Hormuz toward the Red Sea. The August consumer price index released on Sept. 11 rose 3.4% from a year earlier, far above the Fed's target. Reuters noted that "the Fed removed earlier language saying high inflation was caused by supply shocks in the energy sector," calling it "a reflection of policymakers' view that price pressures are too broad."
Through the dot plot in the SEP, the Fed put the median member forecast for the year-end rate at 4.125%, 0.25 percentage point above the 3.875% projected at the June FOMC meeting. That implies room for roughly one more increase at the October or December meetings. As recently as the December and March FOMC meetings, Fed officials had projected a year-end rate of just 3.375%. Every three months, the stance shifted steadily tighter: from one cut this year, to one hike, to two hikes.
As in June, only 18 members submitted rate projections, excluding Warsh. Since taking office in May, Warsh has been critical of forward guidance and the dot plot on the grounds that they give markets inaccurate signals. Of the 18 who submitted forecasts, 12 expected one more hike this year and four expected two. Only two saw the current rate holding through year-end. Former New York Fed President Bill Dudley said in a Bloomberg TV interview on Sept. 10 that "a 0.25 percentage point increase is too small to have a meaningful impact on economic activity."
The Fed also projected personal consumption expenditures price index growth of 3.7% this year, 0.1 percentage point above its June forecast. It raised real gross domestic product growth by 0.1 percentage point each to 2.3% this year and 2.4% next year. It put unemployment at 4.1%, 0.2 percentage point below the June projection.
Warsh: Inflation 'too high, for too long'; policy 'not yet restrictive'
Warsh also left the door open to further increases. In a 30-minute news conference after the FOMC meeting, he repeated the statement's language that "this policy action will contribute to returning inflation to the Fed's 2% objective in a timely manner." He said the decision came "at a time when the U.S. economy appears to be strengthening," adding that "indicators such as new hiring, private incomes and business capital investment have improved in recent months, but inflation has run above target for more than five years." Warsh added, "What is clear is that inflation is too high and has been too high for too long."
Warsh cited a strengthening U.S. economy, still-elevated inflation and shifting geopolitical conditions as reasons the Fed changed course from its July hold. "Inflation risks are tilted to the upside, while labor market risks are broadly balanced," he said, cautioning that "trends matter, and because the data are noisy, relying too heavily on any single indicator is risky." He also said "it is hard to describe current financial conditions as restrictive," characterizing the move as "removing some of the accommodation." The remarks emphasized that the hike was less a full-fledged tightening than a partial unwinding of the cuts delivered between September and December last year.
Asked whether a rate increase could serve as a response to oil prices driven up by a closure of the Strait of Hormuz, Warsh said, "What we have to do is make sure some price changes don't spread through the economy and cause second- and third-round effects. That's our mandate." Asked when he last spoke with Trump, Warsh said he had "nothing to say." He added, however, that "independence runs both ways" and that "those responsible for trade and fiscal policy also need to stay in their own lanes." The comment read as aimed at Trump and Treasury Secretary Scott Bessent, who have sought to push rates lower through trade and fiscal measures.
On bond yields rising ahead of the Fed's decision, Warsh said, "They are moving to reflect the future, so I'd like to leave them free." He attributed higher Treasury yields to a strengthening U.S. economy, competition among hyperscalers to secure capital-expenditure funding, and conflicts around the world.
Short-term yields jump, long-term yields fall; renewed Trump-Fed clash in focus
The Fed's more hawkish-than-expected stance immediately rattled financial markets. New York stocks, which opened mixed, all turned lower right after the FOMC results were released. The Dow Jones Industrial Average fell 1.21%, the Standard & Poor's 500 lost 0.45% and the Nasdaq Composite slipped 0.01%.
The benchmark 10-year Treasury yield and the policy-sensitive two-year yield rose 0.0224 percentage point and 0.0728 percentage point to 5.0180% and 4.7360%, respectively, on the prospect of near-term tightening. The 30-year yield, by contrast, fell 0.0065 percentage point on expectations the Fed's decision would tame longer-term inflation. According to CME FedWatch, the federal funds futures market priced a 50.1% probability of a 0.25 percentage point increase by year-end, a 38.6% chance of 0.50 percentage point and an 11.3% chance of no change. Jeffrey Gundlach, chief executive of DoubleLine Capital and known on Wall Street as the "new bond king," said in a CNBC interview that "the Fed should have gone 0.50 percentage point and watched how the data came in," arguing it should have delivered a stronger jolt to markets.
Economic data released the same day broadly matched the Fed's read of solid growth alongside rising rates. The National Association of Home Builders and Wells Fargo said their housing market index fell three points from August to 32 this month, the lowest since September last year. A reading below 50 means more builders view housing conditions as poor. Rising long-term yields, which push up mortgage rates, hit the market directly. August retail sales released by the Commerce Department, by contrast, rose 1.2% from July, beating the 0.8% consensus compiled by Dow Jones.
Markets are also focused on whether Warsh, four months into the job, will square off with Trump. With midterm elections on Nov. 3, a rate increase risks raising interest costs on the national debt and diluting the effect of tariffs. Trump criticized the Fed on his social media platform Truth Social right after the FOMC meeting, writing that "interest rates in the U.S. should be 1% or lower." He argued that "we are by far the most creditworthy country in the world" and that "if we stopped trading with most of the countries where we run deficits, we would take in at least $1.5 trillion a year." White House deputy spokesman Kush Desai also told Fox News that "the Fed's rate increase is a highly regrettable decision" that "was not supported by any particularly compelling economic rationale."
Aboard Air Force One en route to North Carolina, Trump said he had spoken with Warsh before the Fed's decision and "told him to vote with the board, since the outcome wasn't going to change anyway." Trump said "the Fed board is very hostile and political," while defending Warsh: "I believe in Chairman Warsh."
While the Fed framed this meeting's move as a one-off increase, Wall Street is not entirely ruling out tightening extending into next year. The biggest concern is the deteriorating situation in the Middle East. If clashes between Iran and Gulf states widen crude supply disruptions and oil prices stay above $100 a barrel, inflation could persist into next year. Whether the November midterm results alter Trump's governing agenda is another point to watch.
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