The Federal Reserve raised interest rates on Wednesday 16 September for the first time since July 2023. The Federal Open Market Committee voted 12 to 0 to lift the target range for the federal funds rate by a quarter of a percentage point, to 3.75 to 4 per cent. The effective rate, which had held at about 3.64 per cent since the last cut in December 2025, rose to 3.88 per cent the next day. It is the first upward step in the Fed's benchmark since the 5.25 to 5.5 per cent peak of July 2023, which was followed by six cuts totalling 1.75 points.
The statement was brief. "Inflation remains elevated. Today's policy action will support a timelier return to the Committee's 2 percent goal. The Committee will deliver price stability." It described economic activity as "expanding at a solid pace", attributed elevated uncertainty "in part, to geopolitical developments", and said domestic spending had been resilient.
The committee's own projections show how quickly the outlook turned. In March the median official expected the funds rate to end 2026 at 3.4 per cent — a cut. In June the median was 3.8 per cent. In September it is 4.1 per cent, which implies one more quarter-point increase before the year is out. The path for 2027 moved further, from 3.1 per cent in March to 3.6 per cent in June and 4.1 per cent now, so the median official no longer expects to cut rates next year at all. The end-2028 median rose from 3.1 to 3.9 per cent over the same six months, and the long-run rate edged up from 3.1 to 3.2.
The reason is in the inflation rows. Projected PCE inflation for 2026 has been raised from 2.7 per cent in March to 3.6 per cent in June and 3.7 per cent now, and core PCE inflation from 2.7 to 3.3 to 3.4. The latest actual readings, for July, are 3.7 per cent headline and 3.3 per cent core. Officials still expect headline inflation to fall to 2.3 per cent in 2027 — the same figure as in June — but they now think it will take a funds rate a full point higher than they expected in March to get there.
The projections pair the higher path with a stronger economy, not a weaker one. The median unemployment rate for the end of 2026 has been cut from 4.4 per cent in March to 4.1 per cent, and growth has been nudged up to 2.3 per cent. The pressure the committee is leaning against is energy: the consumer price index for August showed energy prices 16.3 per cent higher than a year earlier, and Brent crude, which fell to about $70 a barrel after the June memorandum between Washington and Tehran, has been back above $100 since early September.
Bond markets had moved first. The 10-year Treasury yield closed at 5.00 per cent on the eve of the decision and 5.01 per cent on the day — above its October 2023 peak of 4.98 per cent, and the highest close since 19 July 2007 — before easing to 4.94 per cent and returning to 5.01 per cent on 18 September. The two-year yield, the maturity most sensitive to expectations for the Fed, closed at 4.74 per cent on the day of the decision.
When this publication previewed Kevin Warsh's first meeting as chair in June, the open question was whether the projections would tilt toward an increase. They did — the median for the end of 2026 rose from 3.4 to 3.8 per cent — and September's decision delivered the increase three months later, with the projections released alongside it pointing to a second before the year is out.