Federal Reserve: Will the First Policy Rate Hike in Three Years Be Followed by Others?

For the first time since the summer of 2023, the Fed’s monetary policy committee opted to raise policy rates. Moreover, the decision was unanimous, whereas the previous meeting had revealed some dissension. Only a few weeks ago, the prospect of monetary tightening at this meeting would have raised eyebrows. However, the key economic indicators released over the past month—particularly those on August inflation and the labour market—supported such a move. The decision was therefore not much of a surprise. A very large majority of consensus forecasters (93 out of 110) expected a 25‑basis-point increase, as did futures markets.

What about the next meetings? Forward guidance has been scarce since Kevin Warsh took the helm of the Fed. Indeed, nothing in today’s terse statement points to any particular move at the meeting ending on October 28. That said, the projections released today by Fed officials suggest another 25‑basis-point rate hike by year-end. Two officials expect rates to remain unchanged, 12 see them ending 2026 at 4.25%—one additional increase—and four others at 4.50%—two additional increases. The projections therefore have a somewhat more hawkish bias. It should be kept in mind, however, that Kevin Warsh does not take part in this exercise.

The economic projections have changed little since June. Real GDP growth was revised slightly upward for 2026 and 2027. The unemployment rate forecasts were revised modestly downward, while the inflation forecast was raised. Today’s decision therefore appears to have been driven more by risks to the outlook than by any meaningful shift in the economy relative to previous expectations, even before accounting for the effects of today’s decision and any further moves.

At the press conference, Kevin Warsh reiterated his aversion to forward guidance and said that he did not want to prejudge any future decisions. He therefore focused on the rationale for today’s increase without suggesting that it marked the start of a tightening cycle. The economy’s resilience, persistent inflation and geopolitical developments appear to have been central to the 25‑basis-point hike. It is therefore reasonable to assume that, should these conditions persist, Fed officials could raise rates again by year-end.

Today’s decision is unlikely to please President Trump. He sharply criticized—and at times insulted—Jerome Powell for failing to lower rates; a rate hike is unlikely to be received any better. For now, the occupant of the White House has not reacted. Perhaps he is giving Warsh the benefit of the doubt, although it was reasonable to assume in the spring that Warsh had secured the appointment by signalling openness to the president’s dovish preferences. Monetary tightening in the lead-up to the midterm elections could raise eyebrows. However, the fight against the rising cost of living is a major issue for voters.