Fed raises rates to 3.75% to 4% while projecting unemployment flat through 2029

The Federal Reserve raised its benchmark rate by a quarter point on Wednesday to a target range of 3.75% to 4.00%, its first increase in more than three years, while projecting no increase in unemployment through 2029. Policymakers marked their end-2026 unemployment forecast down to 4.1%, from the 4.3% they penciled in at the June meeting, and left it at 4.1% every year through 2029.

That pairing is the decision's labor-market tension: tighter money, higher inflation forecasts and no rise in projected joblessness.

The vote was unanimous, 12-0. Two months earlier the committee had held rates steady with three members dissenting in favor of a hike, and in April four governors dissented, the most since 1992, according to Business Insider's coverage of the meeting. "The shift from a 9-3 hold in July to a unanimous 12-0 hike today is the real story," David Krakauer of Mercer Advisors told Reuters. Analysts at Evercore ISI put it differently in a note carried by Reuters: "The striking feature of the dot plot is the disappearance of the doves."

Sixteen of the 18 policymakers who submitted rate projections expect at least one more quarter-point increase before the end of the year, four of them see two, and two expect the Fed to stop here. Chair Kevin Warsh has again declined to submit a projection of his own. For 2027 the committee splits three ways: eight officials see another hike, six see rates holding, four see cuts.

Warsh's framing at the press conference was that the labor market is not the problem. The economy has strengthened since June, he said, with a labor market essentially running at full employment, while inflation trends have shown little improvement. "The plain fact is that inflation is too high and has been for too long," he said. "We must be confident that underlying inflation is moving to our objective clearly and at sufficient speed. Today the FOMC decided that this standard has not been satisfied."

The inflation numbers moved the other way. The committee's headline PCE forecast for this year rose to 3.7% from 3.6% in June, with core at 3.4%, and the date it expects to reach 2% slipped to 2029, a year later than it previously projected. Growth was nudged up to 2.3% this year and 2.4% next. Retail sales rose 1.2% in August. Crude has traded above $100 and diesel hit a record, pressures Reuters has tied to the war in the Middle East, while the policy statement dropped its earlier attribution of elevated inflation to "supply shocks," suggesting officials now see price pressure as broader than energy.

The tightening is showing up first in the cost of capital rather than in payrolls. The 10-year Treasury yield touched 5% this week, a 19-year high, and the two-year rose after the announcement. The average 30-year fixed mortgage had climbed to 7.19%, up 38 basis points since Warsh's Jackson Hole speech on Aug. 28 and more than a full percentage point from a year ago, according to Mortgage News Daily. US homebuilder sentiment fell to a 12-month low in September. Higher financing costs weighing on rate-sensitive construction and capital projects is the most plausible near-term channel from this decision to hiring, and the Fed's own unemployment path says it does not expect that channel to widen into general job losses.

The path beyond Wednesday is contested. RSM's Joe Brusuelas wrote that the Fed is embarking on a cycle of at least three quarter-point hikes and expects two more, in December and March. Goldman Sachs Asset Management's Kay Haigh called one more hike this year a base case contingent on CPI reports and energy prices, and said the Fed will likely skip October given the meeting's proximity to the midterms. Christopher Hodge of Natixis argued the move "will do very little to actually address inflation" but buys the committee time, and said this could be one and done. Market pricing for an October hike ticked up to 56.5% from 54%, per CME Group's FedWatch tool.

The politics are unresolved. Warsh was selected by President Donald Trump with an expectation that he would cut rates, Reuters reported; hours after the decision Trump said US rates should be 1% or lower. Warsh declined to discuss the president, saying "I've got nothing for you on a discussion with the president."

He twice argued the hike serves lower-income households. "The least well off have the most to gain from stable prices," he said. RSM's analysis makes the near-term counterpoint: those households will bear a disproportionate share of the adjustment through variable-rate credit cards, adjustable-rate mortgages and home equity lines. US credit card debt reached $1.26 trillion in the second quarter, near a record, according to Federal Reserve Bank of New York data.