September FOMC Recap—Bark Becomes Bite

Today, the Federal Reserve (Fed) unanimously raised the fed funds target rate range by 25 basis points (bps) to 3.75%–4.00%, its first increase since July 2023 and the first under Fed Chair Kevin Warsh. Today’s action backs up the recent “tough on inflation” talk from Warsh, and he reinforced the message that the Committee will deliver price stability.

The Federal Open Market Committee (FOMC) statement, along with Warsh’s comments during the press conference, emphasized a strong economy with resilient domestic spending and a stable labor force, but noted that inflation remains elevated. The addition in the statement of “today’s policy action will support a timelier return” to the Committee’s 2% goal indicates the members believe that progress on inflation has been too slow. This was further confirmed during the post-meeting press conference as Warsh declared, “For more than five years, inflation has been running above target. So our predominant focus is on the price stability side of our mandate.”

The Summary of Economic Projections (SEP) included expectations for one additional quarter-point rate hike this year, according to the median dot plot. The plot's median path projects the year-end funds rate around 4.1%, holds steady through 2027 and shows a single cut in 2028—notably removing the 2027 cut that had been signaled in June. While GDP and inflation forecasts edged only slightly higher on average in this meeting’s SEP compared with June, the expected policy rate over the next two years is now some 50 bps higher. This reflects the resilience seen in the economic data, somewhat higher inflation, and the challenging geopolitical environment driving energy and other commodity prices higher.

During the press conference, Fed Chair Warsh avoided delineating the conditions under which the FOMC will or will not deliver on any additional rate hikes. Warsh has repeatedly said he wants out of the forward-guidance business, but his comments this time were consistent with the usual FOMC reaction function of the past rather than the more cryptic statements he made in July. Fed Chair Warsh did reiterate the FOMC’s commitment to bringing inflation down to 2%. Today was the first step in walking that walk. Expected inflation in Consumer Price Index (CPI) swaps fell 4 to 5 bps following the policy announcement, though it remains close to year-to-date averages.

Western Asset anticipates that inflation will decline going forward, even if not at a pace to hit the Fed’s target over the next year. While the Fed is expected to raise policy rates further, we believe it is unlikely that rates need to go as high as currently priced into the yield curve. Even if the Fed were to deliver two more rate hikes into 2027, our view is that it still would be a neutral environment for US fixed-income, given current pricing.