Fed Unanimously Hikes from 3.75% to 4%...Both Dot Plot and Forecasts Revised Upward
The Federal Reserve unanimously raised its benchmark rate from 3.75% to 4%. Unlike the previous meeting, which saw three dissenting votes, this decision was unanimous, marking the first rate hike in roughly three years. The statement assessed productivity growth as strong and capital investment as solid, while emphasizing that inflation remains elevated; the previous language suggesting inflation could be transitory was removed, signaling a view that price increases are now structural.
The dot plot median was raised from 3.750 in June to 4.125 this time, suggesting the possibility of at least one more rate hike this year. In its updated economic projections, the Fed raised its 2026 growth forecast by 0.1 percentage point to 2.3% and expected unemployment to remain steady, but its PCE inflation forecast was also revised up by 0.1 percentage point from the previous projection, showing that the Fed remains highly sensitive to inflation.
Fed Chair Jerome Powell avoided directly responding to President Trump's pressure for rate cuts during the press conference, but stressed that price stability benefits struggling citizens the most, emphasizing that controlling inflation is important for protecting low-income households. He stated that future monetary policy would be guided by the trend of inflation rather than individual data points, and explained that while this decision does not mark the start of a tightening cycle, it is a response to currently elevated inflation.
Opinions among the hosts diverged. One side argued that, given the upward revisions to both growth and inflation forecasts, the dismissal of recently favorable indicators as transitory, and the door left open for further hikes, the announcement was not the dovish tone the market had hoped for but rather a hawkish stance. The other side took a positive view, noting that compared to Powell's past ambiguous rhetoric that had heightened uncertainty, this communication represented meaningful progress in reducing market uncertainty, and praised him for firmly maintaining his logic of protecting ordinary citizens despite political pressure from President Trump.
Market analysts suggested that since the late-October meeting falls a week before the U.S. midterm elections, the Fed is unlikely to deliver a sensitive message at that time, with expectations weighted toward a pause in October followed by one more hike before year-end. Indeed, the 10-year Treasury yield fell to around 4.9% immediately after the announcement but climbed back to 5.02% following the press conference, suggesting the market's interpretation has not yet fully settled.
The dollar-strengthening effect of the rate hike was also discussed. The dollar index recorded its highest level since July 31 and its largest daily gain since mid-June, breaking above the 100 level. This raised concerns that it could intensify yen weakness in conjunction with the Bank of Japan's rate decision scheduled for the following day; even if Japan raises rates by 0.25 percentage point, if the rate gap with the U.S. remains unchanged, macro variables such as concerns over unwinding of the yen carry trade could resurface.