The Federal Reserve raised rates by a quarter-point on Wednesday to the 3.75-4.00% range. This marked the first rate hike since 2023 and significantly, the first hike on Chairman Kevin Warsh’s watch. The Fed had been in a prolonged hold, with rates pegged in the 3.50%-3.75% range since December 2025.
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The rate decision, which was unanimous, was driven by stubbornly high inflation as well as a global rise in borrowing costs. The decision was widely expected, as the markets had priced in the hike by over 90%. The Fed had telegraphed its intentions at the Jackson Hole meeting last month, when Warsh stated in his keynote address that the Fed “must be confident enough” that inflation is moving to the Fed’s objective fast enough. With inflation hovering at 3.4% annually, clearly the Fed’s 2% goal remains an elusive target.
Fed Expects Inflation to Inch Higher, More Rate Hikes
At the meeting, the Fed released projections for the personal consumption expenditures price index (PCE Price Index) the Fed’s preferred measure of inflation, indicated that officials expect inflation to nudge higher in 2026. The headline personal consumption expenditures price index (PCE) is forecast to hit 3.7% and core PCE Price Index, which excludes food and energy, is expected to rise to 3.4% - both are 0.1% higher than the Fed’s projections in June. Also, the 2% inflation target is not expected to be reached until 2029.
At a press conference following the meeting, Warsh was very clear that the battle to lower inflation is far from over. Warsh said that, "inflation is too high and has been for too long” and "inflation trends were not passing the test, and I have seen little to change that".
This sentiment was echoed by the Fed’s “dot plot”, a projection of interest rate moves for the remainder of the year which was released at the meeting. Out of 18 participants, 16 expected at least one more rate hike before the end of the year, with only two officials forecasting no further hikes.
At a press conference following the meeting, Warsh was very clear that the battle to lower inflation is far from over. Warsh said that, "inflation is too high and has been for too long” and “inflation trends were not passing the test, and I have seen little to change that". For the markets, this is a stark message that more tightening is on the way, and the key question will be how many more times will the Fed press the rate hike trigger before the New Year.
US Dollar Higher, Stock Market Falls
The US Dollar responded to the Fed rate hike with strong gains against all the majors on Wednesday and is steady in early trading on Thursday. The GBP/USD currency pair slid 0.71% to close at 1.3390 at Wednesday, while EUR/USD fell 0.67% and closed at 1.1463.
The US stock market posted losses on Wednesday, as investors reacted negatively to the Fed’s rate hike announcement.
The S&P 500 Index fell by 33.92 points (0.45%) and closed the day at 7,551.81
The Nasdaq 100 Index was flat, declining by 3.15 points (0.012%) and closed at 25,978.42.
The Dow Jones Industrial Average dropped 631.21 points (1.21) and closed at 51,461.90.
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