Well, let’s get straight to the point, because yesterday the Fed did something it hadn’t done in more than three years. It raised interest rates. And unanimously. Twelve out of twelve.
The market was expecting it, with the probability reaching 90%. So the surprise wasn’t the hike itself.
The surprise was everything else. The dot plot, which points to a second hike later this year. The forecasts saying that the 2% target won’t be reached before 2029. And a chairman who explicitly told reporters that he wasn’t going to tell them anything about what comes next.
WHAT DID THE FED DECIDE?
The Fed raised its benchmark interest rate by 25 basis points. That’s a quarter of a percentage point. The target range is now 3.75% to 4.00%.
And pay attention to something important. This is the first rate hike since July 2023.
The statement was short and firm. “Inflation remains elevated,” they said. And then came the phrase that stood out: “Today’s decision will support a more timely return to the 2% target. The Committee will deliver price stability.”
At the same time, the description of the economy was almost optimistic. Steady growth. Resilient consumer spending. Strong productivity and solid investment. Job creation is keeping pace with the labor force, and unemployment hasn’t moved.
“So if everything is going well, why are they raising rates?” you might be wondering. Because inflation has been above the 2% target for more than five years. And at some point, you can’t call that temporary anymore.
I should remind you that in July, the Fed had kept rates unchanged, but three members had already dissented.
WHAT DOES THE DOT PLOT SAY?
And this is where things get even more interesting.
Along with the decision came the members’ new projections, the famous dot plot. The median estimate for the end of 2026 rose to 4.1%. In June, it was 3.8%.
So what are they telling us? That another rate hike is coming this year.
And the numbers are clear. Of the 18 members, 16 see at least one more hike, 12 see one, and 4 see two. Only 2 are saying, “We’re stopping here.”
But after that? Calm. The rate stays at 4.1% in 2027, falls to 3.9% in 2028, and to 3.6% in 2029. In the longer run, they see it at 3.2%.
Oh, and one more thing. There were 18 dots. Which means the Fed chairman himself, Kevin Warsh, did not submit his own dot. Again.
WHAT DID WARSH SAY?
And now we get to the most interesting part: the press conference.
Warsh put it bluntly: “The plain reality is that inflation is too high, and it has been for too long.” He added that the summer readings didn’t tell him that anything had materially improved. Far too many categories in both CPI and PPI are still running above 3%.
He described the move itself this way: “We removed one dose of accommodation.”
And what changed since July? Three things, he said. Strong labor-market data. Inflation that remained elevated throughout the summer. And geopolitics.
When asked what he would do next, the answer was classic: “I’m not in the business of providing guidance.” Yesterday’s decision was “serious, sober, responsible,” and it certainly wasn’t made because the markets were expecting it, as he emphasized.
He didn’t say a word about his discussions with Trump, even though the White House’s top economic adviser had already said that raising rates would be a “mistake.”
And two more points are worth mentioning. He doesn’t agree that financial conditions are restrictive, and he repeated that it would be difficult to characterize them that way. And he acknowledged that the Fed cannot influence the price of oil. What it can do is prevent higher prices from spreading throughout the economy.
