In the early hours of September 17th Beijing time, the Federal Open Market Committee (FOMC) announced its decision to raise the target range for the federal funds rate by 25 basis points, bringing it to 3.75% to 4.00%. This marks the first rate hike since July 2023. Unlike the July 2026 meeting which saw three dissenting votes, this hike received unanimous approval from all 12 FOMC voting members. The Fed's statement noted that U.S. economic activity is expanding at a solid pace with resilient domestic spending, but inflation remains elevated, explicitly stating that "today's policy action will help achieve the Committee's 2% inflation goal in a more timely manner."

"This rate hike is more of a preemptive adjustment targeting inflation persistence and its contagion risks, reflecting the Fed's policy focus shifting further toward preventing inflation stickiness and expectations from becoming unanchored, given that the U.S. economy and employment remain resilient," said Cheng Shi, Chief Economist at ICBC International.

The latest Summary of Economic Projections (SEP) released alongside the decision shows that Fed officials' median expectation for the federal funds rate by the end of 2026 has been revised up from 3.8% in June to 4.1%, hinting at at least one more rate hike within the year. Additionally, officials slightly lowered their unemployment rate forecast for 2026 from 4.3% to 4.1%, modestly raised GDP growth projections from 2.2% to 2.3%, and increased their inflation forecast from 3.6% to 3.7%.

Luo Zhiheng, Chief Economist at Yuekai Securities, observed that the SEP lowered unemployment projections while raising inflation forecasts, with the dot plot median indicating another rate hike in 2026 to be maintained through 2027. Fed Chair Warsh has maintained a restrained tone in communication, denying this was a "market-guided hike" and framing the purpose as "removing accommodation" rather than "increasing restriction," likely aiming to downplay the negative impact on the economy and markets.

Against this backdrop, expectations point to a further 25 basis point hike in December 2026, pushing the rate range to 4.00% to 4.25%. The rate path beyond 2027 will depend on multiple factors, including international geopolitical developments and oil price trends, the sustainability of AI capital expenditure, and whether U.S. equities experience a significant correction.

"A single stronger-than-expected inflation reading is unlikely to significantly alter the Fed's overall policy path. The dot plot and economic projections suggest internal differences remain regarding the magnitude of future hikes, meaning that while the current policy focus has shifted toward guarding against inflation risks, subsequent adjustments remain conditional," Cheng Shi analyzed. Overall, compared to past frameworks that emphasized expectation management and policy communication, the Fed's tolerance for inflation remaining above target may be narrowing, but whether further hikes are needed will still depend on the actual evolution of U.S. inflation persistence, cost pass-through, and labor market conditions.

Following this rate hike, all three major U.S. stock indices closed lower on the day, with the Dow Jones Industrial Average dropping 1.21%, its largest decline. The U.S. dollar index extended its recent upward momentum, breaking above the 100 threshold, while the 10-year Treasury yield fluctuated around 5%. International gold prices dipped slightly before rebounding.

Luo Zhiheng noted that on the U.S. Treasury front, the recent rise in long-term yields is only partially attributable to heightened Fed rate hike expectations; multiple factors have already been driving long-end yields upward. In the coming period, markets may continue to speculate and worry about the Fed's pace of future hikes, and this uncertainty could lift term premiums, keeping longer-dated Treasury yields elevated.