Fed Takes Aim at Inflation with September Rate Hike

The US Federal Reserve raised interest rates by 25 basis points on September 16, marking the start of its efforts to bring inflation back down to its 2% target. This decision was widely anticipated and aligns with the Fed's hawkish rhetoric under Chair Warsh.

The median projections from the Federal Open Market Committee suggest one more rate hike by the end of this year, indicating a solid pace of economic expansion despite geopolitical uncertainty.

Market analysts at BNY believe that real rates appear slightly overstretched, potentially creating opportunities in U.S. fixed income. However, they disagree with market expectations for four 25-basis-point hikes over the next 12 months, citing rising costs of semiconductors and information processing equipment as a concern.

BNY's projections suggest that core personal consumption expenditures price index inflation will be at 2.2% by 2028, and the fed funds rate will be at 3.9%. This implies a higher real policy rate is needed to bring inflation back down to its target.