[New York = E-Daily Correspondent Seong Joowon ] The U.S. Federal Reserve (Fed) has raised interest rates for the first time in more than three years, reigniting its battle against inflation. With the U.S. economy and labor market showing stronger-than-expected performance, high inflation showing little sign of abating, and geopolitical uncertainties persisting, the Fed shifted the focus of its policy toward raising interest rates to curb inflation. As most Fed members anticipate additional hikes this year, market attention has now shifted from whether this hike will be a one-off event to how much further rates will rise and how long they will remain at elevated levels.

At its regular Federal Open Market Committee (FOMC) meeting on the 16th (local time), the Fed raised the benchmark interest rate by 0.25 percentage points, from the previous range of 3.50–3.75% per annum to 3.75–4.00%. This marks the Fed’s first rate hike in three years and two months, since July 2023. All 12 voting members voted in favor of the hike. In a statement, the Fed said, “Inflation remains elevated,” adding that this move would help bring inflation back to the 2% target “more promptly.”

A Strong Economy Provides ‘Room for Hikes’… 16 Members Say “We Need to Raise Rates Further This Year”

The Fed’s ability to raise interest rates for the first time in three years stems from a U.S. economy that is stronger than expected. The Fed raised its real gross domestic product (GDP) growth forecast for this year from 2.2% in June to 2.3%, and for next year from 2.3% to 2.4%. Conversely, it lowered its unemployment rate forecasts for this year and next year from 4.3% to 4.1%, respectively. This means there is now greater leeway to focus on curbing inflation without significantly damaging the economy or the job market.
The issue is inflation. The Fed raised its forecast for this year’s Personal Consumption Expenditures (PCE) price inflation from 3.6% to 3.7% and its forecast for core PCE inflation from 3.3% to 3.4%. This combination—rising growth, falling unemployment, and rising inflation expectations—has effectively strengthened the case for interest rate hikes.
The projected interest rate path has also shifted significantly upward. In the dot plot—which reflects FOMC members’ interest rate projections—the median forecast for the benchmark rate at the end of this year stands at 4.1%, up 0.3 percentage points from 3.8% in June. Of the 18 members who submitted projections, 16 believed at least one additional rate hike this year would be appropriate, and four of them anticipated two additional hikes. The median forecast for the end of next year also rose to 4.1%, up 0.5 percentage points from the June projection of 3.6%. At least based on the dot plot, this is far from a path that would involve reversing the rate hike immediately after it is implemented.

Wash’s Explanation of Changes Over the Past 7 Weeks… “Economy, Inflation, Geopolitics”

At a press conference, Chairman Kevin Wash personally cited three key changes that have occurred in the seven weeks since the interest rate was held steady in late July: economic strength, inflation trends, and shifts in the geopolitical landscape.
Wash assessed that the U.S. economy had grown stronger based on a broad range of indicators, including the labor market. Regarding summer inflation data, however, he explained that it “did not meet” the criteria he had set and that he had seen little information since then to reverse that assessment. “The clear fact is that inflation has been too high for too long,” he said, emphasizing that “our primary focus is on our mandate of price stability.”
The geopolitical environment has also changed. Amid growing uncertainty surrounding energy and commodity prices due to conflicts in the Middle East and other parts of the world, the Fed is wary of second- and third-order ripple effects, where price increases in specific sectors spread to the broader economy. In fact, the latest FOMC statement omitted the phrasing from the July statement that described rising prices for energy and other goods as “supply shocks.” Instead, it prominently highlighted the commitment to returning inflation to the 2% target in a timely manner.
Wash also viewed current financial conditions as not sufficiently tight. He stated, “It is difficult to describe broad financial conditions as tight,” adding that FOMC members generally shared this assessment. Regarding this rate hike, he described it as “removing some of the accommodative stance.”
In particular, he drew a clear line against the view that inflation can only be curbed by sacrificing economic growth and employment. Wash noted that the current unemployment rate is effectively at full employment, adding, “I do not believe it is necessary to harm the labor market to achieve our goals.” The judgment that a strong economy can withstand interest rate hikes essentially underpins this decision.

Wall Street: “This Won’t End with Just One Hike”… Stock Prices Down, Interest Rates Up

The market reacted more sensitively to the possibility of further tightening ahead than to the Fed’s policy shift itself. Since the 0.25 percentage point hike was already priced in at over 90%, the immediate reaction following the announcement was limited. However, when Wash expressed strong caution regarding inflation during the press conference, the New York stock market gave up its gains and U.S. Treasury yields rose. Around 3:30 p.m., the Dow Jones Industrial Average fell more than 700 points, or about 1.4 percent, while the S&P 500 and Nasdaq indices dropped approximately 0.7 percent and 0.3 percent, respectively. The yield on the 10-year U.S. Treasury note rose above 5% again, while the yield on the 2-year note—which is sensitive to monetary policy—climbed to 4.71%.
The bond market is currently pricing in a roughly 50% probability of another rate hike at the upcoming October FOMC meeting. Shima Shah, Chief Global Strategist at Principal Asset Management, assessed that “the debate has now shifted from whether rates will rise again to how many more hikes there will be,” suggesting it is unlikely this hike will be a one-off.
However, Wash did not commit to a specific future rate path. When asked whether consecutive hikes would follow, he stated, “I am not the one providing forward guidance,” indicating that he would not prejudge future decisions. He also did not submit his own rate forecast to the dot plot.
Ultimately, the key factors that will determine the future path of interest rates are expected to be whether inflation spreads, the strength of the U.S. economy, and the geopolitical situation. With the economy remaining robust, if energy-driven inflationary pressures spread to services and goods across the board, the case for additional hikes could grow even stronger. Conversely, if inflationary pressures subside rapidly or economic growth and employment slow more sharply than expected, the Fed’s pace of tightening could change. Market attention is now focused on whether the Fed, which raised rates for the first time in three years, will proceed with another hike this coming October.