Slapping Trump in the Face: Fed Hikes Rates for the First Time in Three Years

Source: Wall Street See

US President Trump's hopes of insisting on rate cuts have been dashed.

On Wednesday, September 16, US Eastern Time, the Federal Reserve's Federal Open Market Committee voted unanimously to raise the benchmark interest rate by 25 basis points to a range of 3.75% to 4.00%.

The latest dot plot shows that there will be at least one more rate hike this year, and the market's odds of a October rate hike immediately rose to about 50%, with expectations for a December hike also rising in tandem.

The Fed raised rates for the first time in three years, sending a strong signal that the tightening cycle is far from over. The hawkish signal triggered a chain reaction in the markets, with US stocks and gold both under pressure, the dollar surging to a one-month high, and the yield curve sharply bear-flattening.

This press conference ended about 20 minutes earlier than usual, the shortest on record recently, in line with Warsh's consistent stance of not providing forward guidance. According to Bloomberg, the market volatility on this Fed day once again came mainly from the press conference rather than the FOMC statement itself.

Fed unanimously approves first rate hike in three years, dot plot suggests one more hike this year

On Wednesday, September 16, US Eastern Time, the Federal Reserve announced after its monetary policy committee FOMC meeting that it would raise the target range for the federal funds rate from 3.50% to 3.75% to 3.75% to 4.00%, a 25 basis point increase.

This is the Fed's first adjustment to the policy rate in 2026, and also the first rate hike since July 2023. Before this, the Fed had decided to keep rates unchanged for five consecutive monetary policy meetings.

This rate decision was completely within investor expectations. As of Tuesday's close, CME tools showed that the futures market expected the probability of a 25 basis point rate hike by the Fed this week to exceed 92%, the probability of another hike of the same magnitude at the next October meeting to reach 44%, and the probability of two 25 basis point hikes in total by the end of this year to be close to 80%. This shows that most market participants are betting that September is not a one-off rate adjustment and that the Fed will act again within the year.

Nick Timiraos, a reporter known as the "new Fed wire," wrote that at this meeting Fed officials unanimously approved the first rate hike in three years, implicitly weakening the White House's argument that "inflation is not a concern," and that most officials now expect one more hike this year, with energy price shocks and surging artificial intelligence (AI) investment reshaping the inflation outlook.

Timiraos noted that analysts had previously pointed out that although the market has recently focused heavily on August inflation data, the biggest change in the economic outlook actually stems from rising energy and commodity prices. Former "third-ranking Fed official" and New York Fed President Dudley said: "The key is that tensions in Iran have intensified again, and the scale of the energy price shock is expanding again."

The rate hike decision itself was within market expectations, but the signals from the dot plot and the press conference were overall more hawkish than expected. The latest dot plot removed the previous median forecast of rate cuts next year, while showing that most officials support at least one more rate hike this year.

In the chart below, blue dots represent the September dot plot expectations, and gray dots represent the June dot plot expectations.

The dot plot shows that among the 18 Fed officials providing rate expectations, 12 expect another 25 basis point rate hike within 2026 after the September hike, four expect two more such hikes this year, two expect rates to remain unchanged for the rest of the year, meaning no further hikes after September, and no one expects a rate cut this year.

However, there are significant divergences in the rate path for 2027. Eight Fed officials expect one rate hike next year, six expect rates to remain unchanged for the full year, three expect two rate cuts, and one expects four rate cuts. This means some officials implicitly believe there is a risk of policy error in the current path.

Luigi Buttiglione, CEO of consultancy LB Macro, said:

By saying this rate hike helps return to the 2% inflation target "in a more timely manner," the FOMC clearly signaled that there is still more work to do, and likely at least three more rate hikes are needed.

The median Fed official rate projections released after Wednesday's meeting showed that, with expectations for this year's tightening increasing, Fed officials raised their rate forecasts for this year and the next two years:

The median federal funds rate at the end of 2026 is 4.1%, compared with the June forecast of 3.8%; the federal funds rate at the end of 2027 is 4.1%, compared with the June forecast of 3.6%; the federal funds rate at the end of 2028 is 3.9%, compared with the June forecast of 3.4%; the federal funds rate at the end of 2029 is 3.6%; and the longer-run federal funds rate is 3.2%, compared with the June forecast of 3.1%.

In addition to deciding to raise rates, the statement from this meeting also specifically mentioned that this "policy action taken will help promote a more timely return of inflation to the 2% target set by the (FOMC) Committee."

Compared with the previous meeting statement at the end of July, another major difference in this statement is that all 12 voting FOMC members supported the rate hike, while at the previous meeting three voters opposed keeping rates unchanged. This clearly runs counter to the position of US President Trump, who has repeatedly said he favors rate cuts, highlighting the anti-inflation pressure facing the Fed amid Middle East conflicts pushing up oil prices.

In terms of commenting on the economy, this meeting statement was basically unchanged from the previous one. This statement continued to emphasize that the Fed is committed to achieving price stability and once again reiterated: the US economy is expanding steadily, job growth is keeping pace with growth in the labor force, and the unemployment rate is basically unchanged.

The previous two statements said that Middle East conflicts had created high economic uncertainty and that inflation remained elevated, partly due to rising energy prices. This statement changed the wording from "Middle East conflicts" to geopolitical developments and added an assessment that domestic spending is resilient. The statement read: "Although uncertainty remains high, partly affected by geopolitical developments, domestic spending has shown resilience."

In addition, this statement slightly lowered its assessment of the capital investment situation. The previous statement said both capital investment and productivity growth were strong, while this one, immediately after the sentence about high uncertainty, wrote: "Productivity growth is strong, and the momentum in capital investment is solid."

The red text below shows the deletions and additions in this resolution statement compared with the previous one.

Warsh: Rate hike shows firm consensus within FOMC; inflation is too high for too long, and lowering inflation will not sacrifice jobs

The Fed raised rates by 25 basis points against the backdrop of inflation still above target but the US economy and labor market showing resilience. Chair Warsh made it clear that the current top priority is to bring inflation back to the 2% target in a more timely manner, while refusing to provide forward guidance on the future rate path.

Warsh repeatedly emphasized at the press conference that inflation is the core reason for this policy action.

"The obvious fact is that inflation is too high, and it has been too high for too long."

But he said that based on the latest CPI and PPI data, the underlying trend has improved meaningfully. The year-over-year increase in the August headline PCE price index may be around 3.6% (3.7% in July), with core PCE and CPI at about 3.2% (3.3% in July) and 2.4%, respectively.

He previously proposed at the Jackson Hole conference that the Fed needs to observe inflation trends rather than focusing on just one data point. At this press conference, he once again emphasized:

"The trend matters. Data points are noisy, and data point dependence is a dangerous focus."

Warsh said that over the past decade or so, market participants and reporters have become accustomed to "holding their breath waiting for one data point," but that is not how he makes decisions. "I am not holding my breath waiting for any particular data point, whether it was this morning's retail sales or last week's CPI."

As for whether rate hikes could ultimately cause economic growth to fall below potential and worsen the job market, Warsh gave a relatively clear answer.

"I do not think we need to damage the labor market to achieve our goals."

Warsh said the US economy is strengthening, the labor market is generally near full employment, current US domestic spending is resilient, productivity growth is strong, capital investment remains strong, and credit flows, especially corporate credit, have been "very strong." At the same time, he believes that current broad financial conditions are not restrictive.

"It is hard for me to describe broad financial conditions as restrictive," Warsh said. He said this judgment was also broadly shared by the committee, so the Fed decided to "remove some accommodation" to make financial and credit conditions more consistent with policy goals.

In response to the notable rise in long-term US Treasury yields in recent months, especially in recent weeks, Warsh said he wanted to let the bond market "tell me whatever story it wants to tell" and try to analyze the reasons behind the yield changes. He gave three main factors: a stronger US economy, competition for capital, and geopolitics.

When asked about the rapid development of AI and warnings from people in the AI industry about the risk of losing control, Warsh said he himself had spent a great deal of time thinking about AI and its economic impact. But Warsh stressed that AI-related risks, rewards, and policy choices fall within the decision-making scope of other parts of the government. For the Fed, what matters is how these policy decisions ultimately affect its day-to-day work.

US stocks and bonds fall together, AI sector relatively resilient, dollar strengthens, gold plunges intraday

US stocks were basically stable before the Fed decision was announced, but quickly turned lower during the press conference.

Fed Chair Warsh said at the press conference, "We removed some degree of accommodation to make financial and credit conditions more consistent with our goals," wording widely interpreted by the market as a clear hawkish stance.

Major indexes briefly rebounded after hitting intraday lows, but still broadly closed weaker overall.

The S&P 500 fell 0.45%, and the Dow Jones Industrial Average dropped 1.2%, hitting a three-month low. Only the Nasdaq 100 was nearly flat, with AI-related sectors relatively resilient.

The 10-year US Treasury yield rose to 5.02%, while the 2-year yield climbed 7 basis points to 4.74%, the highest since 2024. The 30-year yield was basically flat, and the spread between the 2-year and 30-year narrowed by about 8 basis points, the flattest level since April 2025.

Meanwhile, the dollar index strengthened for a sixth consecutive day, rising to a near one-month high, while spot gold fell 0.5% to $4,269.95 per ounce. Crude oil prices fell about 3.6% as the Middle East supply disruption partially eased, with WTI crude at $102.05 per barrel.