Fed Raises Rates Again Signaling More Hikes to Tame Inflation

The U.S. Federal Reserve raised its policy rate by 25 basis points (bps) in its September meeting, meeting market expectations. The Federal Open Market Committee (FOMC) also updated its economic forecasts, signaling that another hike is likely this year and possibly one in 2027 if inflation does not ease sufficiently. The Fed’s preferred inflation measure, core Personal Consumption Expenditures (PCE), has reaccelerated above a 3% annual pace, while headline inflation has also risen due to higher energy prices.

Fed Chair Kevin Warsh described the rate hike as removing a 'dose' of accommodation to achieve a timelier return to 2% inflation, suggesting a more restrictive policy stance than previously indicated. The Fed’s decision comes amid slower progress toward its inflation target, with supply shocks and demand-side factors contributing to persistently elevated inflation. Warsh emphasized the Fed’s commitment to price stability, contrasting with the median SEP projection that core PCE inflation will not return to target until 2029.

The labor market is not currently driving U.S. inflation, as nominal wage growth has decelerated and productivity has helped restrain unit labor costs. Inflationary pressures are instead coming from strong corporate profits and wealth gains, along with non-labor costs. The Fed’s actions reflect a shift under Warsh’s leadership, with a stronger focus on ensuring inflation expectations remain anchored despite geopolitical and economic uncertainties.