Fed Resumes Tightening Cycle with 25-Basis-Point Hike; Dot Plot Signals One More Increase This Year

 

The Federal Reserve announced a 25-basis-point increase in the target range for the federal funds rate, bringing it to 3.75%–4.00% in a move that aligned with mainstream market expectations.

 

The decision marks the Fed's first rate hike in over three years, following a tightening campaign that ran from March 2022 to July 2023 across 11 consecutive hikes totaling 525 basis points.

 

 

According to the post-meeting statement, the Federal Open Market Committee (FOMC) approved the resolution unanimously by a 12–0 vote. The policy text stated:

 

The FOMC decided to raise the target range for the federal funds rate by 25 basis points to 3.75%–4.00% in support of its dual mandate. The Committee will continue implementing its policy of maintaining ample reserves within the banking system.

 

Economic activity is expanding at a solid pace. Although uncertainty remains elevated, partly reflecting geopolitical developments, domestic spending remains resilient. Productivity growth is robust, and capital investment is steady. Job gains are matching labor force expansion, leaving unemployment little changed.

 

Inflation remains elevated. Today’s policy action will help bring inflation back toward the Committee's 2% objective in a more timely manner. The FOMC is strongly committed to achieving price stability.

Updated Economic Projections 

Simultaneously released Summary of Economic Projections (SEP) figures showed median GDP growth expectations among Fed officials at 2.3% for 2026, 2.4% for 2027, and 2.2% for 2028, compared to June forecasts of 2.2%, 2.3%, and 2.2%, respectively. The median growth projection for 2029 stands at 2.1%.

 

Additional projections indicate:

 

• Unemployment rate medians through late 2028 are pegged at 4.1%, 4.1%, and 4.1% (compared to June expectations of 4.3%, 4.3%, and 4.2%), with a late-2029 forecast of 4.1%.
• PCE inflation medians are projected at 3.7% (2026), 2.3% (2027), and 2.1% (2028), compared to prior projections of 3.6%, 2.3%, and 2.0%, with 2029 anticipated at 2.0%.
• Core PCE inflation medians are forecast at 3.4% for 2026, 2.5% for 2027, and 2.2% for 2028 (versus June forecasts of 3.3%, 2.5%, and 2.1%), stabilizing at 2.0% in 2029.

 

The updated dot plot shows that the 18 FOMC participants project the federal funds rate will rise to 4.00%–4.25% by the end of 2026. Put simply, the consensus view among officials anticipates one additional rate hike before year-end, though 4 participants pencil in two further increases from the current level, while 2 officials foresee no additional moves.

 

Looking ahead to 2027, officials broadly project the policy rate to finish the year at 4.00%–4.25%. Among individual estimates, 3 participants expect rates to ease back to 3.50%–3.75%, while one projects a drop to 3.00%–3.25%.

 

Analysts highlight that officials bumped up their estimate of the longer-run neutral federal funds rate to 3.2% from 3.1%, signaling that policymakers view the structural neutral rate as higher.

 

Numerous economists attribute this upward shift to the massive artificial intelligence investment boom, which has helped drive a structural transition in the U.S. economy away from a savings glut toward an investment surge—a dynamic previously acknowledged by Fed Chair Kevin Warsh.