⁠Fed Hikes to 4%, and It May Not Be Done

The Federal Reserve raised interest rates for the first time since 2023, delivering a unanimous 25 basis point increase to 3.75%–4.00% in September.

Inflation is still running too high for policymakers’ comfort, keeping the Fed on a tighter path despite stronger expectations for US growth.

One hike may not be enough. The projections show that 16 of 18 Fed officials see scope for at least one more 25bp hike before year-end, while four expect two additional increases. Chair Kevin Warsh again declined to submit his own rate projections, leaving his preferred path outside the closely followed dot plot.

Growth Gets an Upgrade

The Fed’s new projections suggest the economy can absorb higher borrowing costs better than previously thought. 2026 GDP growth was revised to 2.3% from 2.2%, while the 2027 forecast increased to 2.4% from 2.3%. The labor outlook also improved. Unemployment is now projected at 4.1% in both 2026 and 2027, down from the previous estimate of 4.3%.

Inflation Refuses to Cooperate

Stronger growth comes with a problem: inflation is proving harder to bring back to the Fed’s 2% target. The 2026 headline PCE forecast rose to 3.7% from 3.6%, while core PCE was lifted to 3.4% from 3.3%. The 2027 forecasts were unchanged at 2.3% for headline and 2.5% for core inflation.

The projections leave the Fed with an economy that is growing faster and employing more people than previously expected, but also producing stubborn price pressure. That combination gives policymakers room to keep rates high and leaves further tightening firmly on the table.