On 16 September the Federal Reserve raised its policy rate by 0.25 percentage points, to a range of 3.75–4.00%. This is the first increase since July 2023 and ends nearly two years of rate cuts. All twelve voting members supported the decision, and no one dissented.
The statement was short, in the style Chair Warsh has adopted. It said the economy is growing solidly, consumer and business spending is holding up, productivity and investment are strong, and unemployment has barely moved. It added one new line: the rate increase is meant to bring inflation back to the 2% target sooner.
Warsh gave three reasons for the move: the labour market and the economy are stronger than expected, inflation is not improving enough, and geopolitics is pushing commodity prices higher. He said the hike had "removed a dose of accommodation" in other words, policy had been too loose, and repeated the phrase three times. He also said most of the Committee agrees that financial conditions are still not tight. He gave no hint about the next move.
Effect on markets
Bond markets reacted immediately. The 2-year Treasury yield, the most sensitive to Fed policy, rose after the announcement, with clear jumps when the forecasts were published and again when Warsh used the "dose of accommodation" phrase. The market-implied chance of another hike rose to 51% for October and 78% for December.
Shares opened higher but closed lower. The Dow fell 1.2% to 51,461, the S&P 500 fell 0.5% to 7,551, and the Nasdaq finished flat at 25,978. It is worth noting that most of the repricing happened before the meeting: the 10-year yield rose above 5% on Monday, its highest close since 2007, driven by oil prices (up about 20% this month because of the Iran conflict), heavy government bond issuance, and large borrowing by AI companies. The 30-year mortgage rate is now 7.19%.
What to expect next
The Fed also published its members’ rate forecasts, known as the dot plot, and these were more hawkish than expected. Sixteen of the eighteen members expect at least one more increase this year, and four expect two. Their forecasts keep rates high all the way to 2029. Their estimate of the neutral rate, the level that neither slows nor stimulates the economy, rose from 3.06% to 3.25%, a larger jump than usual, which means they now believe rates need to be higher than they previously thought.
For markets, the practical point is this. Short-term rates now follow a reasonably predictable path. Long-term rates do not, because they depend on oil prices and on how much debt the government issues. So the bigger risk is that long-term yields keep rising on a poor inflation reading even if the Fed does nothing. Oil is the variable to watch. If it falls, two hikes is probably the ceiling. If it rises again, a third hike becomes likely and share prices come under pressure from higher yields at the same time.
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