The Federal Reserve, led by new Chairman Kevin Warsh, unanimously decided to raise the federal funds rate by 0.25 percentage points, setting the new range at 3.75% to 4%. This marks the first rate increase since 2023 and defies calls from President Donald Trump for lower borrowing costs. Warsh stated that the committee "removed a dose of accommodation," acknowledging that inflation remains "too high" and has been so for too long. The decision comes amidst sharp price rises triggered by the Middle East conflict and increased demand for AI components, which policymakers are trying to prevent from becoming a broader inflation crisis. The move was widely interpreted as hawkish and a credibility-restoring step for Warsh.
Warsh emphasized the Fed's commitment to achieving price stability and a "timelier return" to its 2% inflation goal. He noted that while the U.S. economy is strengthening with robust domestic spending, strong productivity growth, and healthy capital investment, inflation remains elevated. The Fed's preferred measure, core Personal Consumption Expenditures (PCE), has reaccelerated above a 3% annual pace, and headline inflation has also risen due to higher energy prices. The FOMC's median projections indicate that total PCE inflation is expected to be 3.7% this year, falling to 2.3% next year, with the unemployment rate holding steady at about 4.1%.
The market reacted to the hawkish decision with the dollar rising against the euro, and the two-year Treasury yield jumping 0.07 percentage points to 4.74%, a significant increase since the Fed's July meeting. Futures markets are now pricing in nearly 90% odds of at least one more rate increase before year-end. The Fed's own projections suggest that a dozen officials expect one additional quarter-point rise by the end of 2026, four expect two more rises, and two expect rates to hold at current levels. However, the committee's projections indicate inflation is not expected to reach the Fed's 2% goal until 2029, a point Warsh addressed by stating these were not his personal forecasts and reaffirming his dedication to the price stability objective.
Analysts widely viewed the decision as hawkish. Subadra Rajappa of Société Générale stated that "the decision and the press conference were both hawkish... The focus was very much on inflation." Robert Sockin of PGIM noted that "the distribution of risks shows almost no concern about activity, and ongoing elevated concerns about inflation — suggesting that risks remain tilted to the Fed doing more if inflation continues to run high." Priya Misra of JPMorgan Asset Management commented that the hawkish decision "allows us to move away from questions about Fed independence and credibility." These reactions highlight the market's perception that the Fed is serious about combating inflation, even if it means further rate hikes.
