By The Federal Reserve raised interest rates by a quarter percentage point on Wednesday, taking the federal funds target range to 3.75% to 4%.
The Federal Open Market Committee approved the decision unanimously in a 12-0 vote.
The Fed said economic activity is expanding at a solid pace, while domestic spending has remained resilient.
It also pointed to strong productivity growth and robust capital investment.
“Job gains have kept pace with the workforce, and the unemployment rate has changed little,” the FOMC said in its statement.
The central bank nevertheless acknowledged that inflation remains elevated and said Wednesday’s policy action would support a more timely return to its 2% objective.
Another hike remains possible
The Fed’s dot plot showed that 16 of the 18 participants expect another rate increase, while four of those officials see the possibility of two additional hikes.
Two participants expect policymakers to stop after the latest increase.
Warsh has chosen not to submit an individual dot since becoming chair.
There are no additional rate increases penciled in for subsequent years.
Officials instead see one rate cut in 2028 and at least one in 2029.
The projections underscore how unusual the current policy path is.
The Fed rarely raises rates just once when policymakers believe inflation remains too high and requires restrictive policy, just as it generally avoids isolated cuts when trying to stimulate weak demand.
Inflation forecasts move higher
Fed officials also raised their inflation forecasts for this year.
The central bank now expects headline personal consumption expenditures inflation to reach 3.7% this year, while core PCE inflation is projected at 3.4%.
Both forecasts are 0.1 percentage point higher than the June projections.
The Fed does not expect inflation to return to its 2% target until 2029.
Officials nevertheless expect inflation to decline sharply in 2027, forecasting headline PCE inflation at 2.3% and core PCE at 2.5%.
The higher near-term projections reflect the unusual nature of the inflation pressures facing the economy.
Policymakers have generally looked through temporary increases caused by factors such as higher fuel prices and tariffs.
This time, however, officials have been weighing the cost of continuing to look through those price increases, particularly as labor-market conditions have stabilized.
The committee lowered its unemployment forecast to 4.1%, down 0.2 percentage point from its June projection.
Markets had already priced the hike
The decision came after a sharp shift in market expectations over the past month.
Traders had assigned a better than 90% probability to a quarter-point rate increase ahead of Wednesday’s meeting, according to CME Group’s FedWatch gauge.
A month earlier, the implied probability had been around 36%.
Expectations changed following Fed Chair Kevin Warsh’s remarks at the central bank’s annual symposium in Jackson Hole, Wyoming, followed by another round of stronger-than-expected inflation data and signs of a firming labor market.
The resurgence in crude oil prices above $100 a barrel amid the Iran conflict added another source of inflation pressure and strengthened expectations for tighter monetary policy.
The result is a Fed outlook that is more restrictive than markets had expected only weeks ago.
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