The Fed raised interest rates this week for the first time since 2023. The 25-basis point hike to a target range of 3.75%–4.00% was unanimous at 12-0, a notable shift from July when only three voting members favored an increase. The entire committee now agrees that inflation requires a policy response.
The rate decision itself was widely expected.
The Dot Plot Says More Is Coming
The updated Summary of Economic Projections (AKA dot-plot) tells a hawkish story. Of the 18 participants, 16 see at least one more hike this year and four see two. The median fed funds rate for year-end 2026 is 4.1% and many anticipate another 25bp hike after the November elections.
More important is 2027. The median rate stays at 4.1% through year-end 2027, meaning the committee does not expect to cut rates next year. Perhaps, this is the committee indirectly acknowledging the potential for elevated oil prices continuing into next year.
Also, GDP projections were bumped up to 2.3% and unemployment revised down to 4.1% across the entire forecast horizon.
Warsh’s Press Conference
Chairman Warsh stayed on brand: no forward guidance, no commitment for October. But his tone left little ambiguity. He said that “this summer’s inflation readings do not tell me that underlying trends have meaningfully improved.”
He acknowledged that the Fed cannot stop energy price shocks but argued it has a role in preventing those shocks from broadening into second and third order effects. That framing matters — it means the committee is watching for pass-through from energy into core categories, which is exactly what the PPI showed last week.
The 10-Year Crosses 5%
The 10-year Treasury yield crossed the 5% level this week for the first time since 2023. If you have been following my chart below, you shouldn’t be surprised.
Last week I wrote that the next leg higher in yields should carry us to the mid-5% area. That move is underway. The combination of a hawkish dot plot, rising inflation expectations, and massive AI-related debt issuance is pushing term premium higher across the curve.
The initial market reaction to the hike was a sell-off in equities and a spike in the 2-year yield. You can see in the chart below of the S&P 500 index that stocks have held up this summer despite the oil shock and the rise in rates. Earnings have been good this year and the next name on the calendar to watch for the strength in the AI trade is Micron on September 30th.
Looking Ahead
Last week’s blog said the inflation data put the FOMC in a corner. This week they acted on it. The unanimous vote was the clearest signal yet that the committee’s tolerance for elevated inflation has run out.
The next FOMC meeting is October 27–28. With oil near $100 and the dot plot skewing toward another hike, I think the October meeting would normally be another 25bp hike if it wasn’t for the elections. What matters more for markets is the rate of change in the 10-year yield so that is a focal point as rates re-normalize.
The bond vigilantes are in control right now and the Fed is following their lead.
Thank you for being a subscriber!
President, Kisco Capital
This commentary is provided by Kisco Capital LLC for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any security. Opinions are subject to change without notice. Past performance is not indicative of future results. All investments involve risk, including possible loss of principal. Kisco Capital and its clients may hold positions in securities discussed herein.
