The US Federal Reserve has raised interest rates for the first time since 2023, returning to tighter monetary policy as persistent inflation and geopolitical uncertainty continue to shape the economic outlook.

At its September meeting, the Federal Open Market Committee voted unanimously to increase the federal funds target range by 25 basis points to 3.75%–4.00%. The move marks the first rate increase since July 2023, following a period in which the Fed had shifted towards rate cuts and then held policy steady.

The central bank said the US economy continues to expand at a solid pace, supported by resilient domestic spending, strong productivity growth and robust capital investment. Employment conditions have also remained relatively stable, with job gains keeping pace with growth in the workforce. 

However, inflation remains the Fed’s primary concern. Policymakers said the latest increase was intended to support a faster return towards the central bank’s 2% inflation target, while acknowledging that uncertainty remains elevated partly because of geopolitical developments.

Inflation Keeps Pressure on the Fed

Recent price pressures have complicated the outlook for monetary policy. Higher energy costs have added to inflation concerns, while the broader economy has continued to show resilience despite elevated borrowing costs.

The Fed’s latest projections show officials expect PCE inflation to reach 3.7% in 2026, slightly higher than the 3.6% projected in June. Core PCE inflation, which excludes food and energy, is projected at 3.4% this year. Inflation is then expected to moderate, with headline PCE inflation projected at 2.3% in 2027 and 2.1% in 2028. 

At the same time, policymakers upgraded their expectations for economic growth. Median projections put real GDP growth at 2.3% in 2026, while the unemployment rate is expected to end the year around 4.1%. 

This combination of relatively firm economic activity and above-target inflation gives the Fed reason to remain focused on price stability, even as higher interest rates increase borrowing costs for households and businesses.

More Tightening Could Follow

Wednesday’s decision may not be the end of the Fed’s tightening cycle. The central bank’s latest projections show a median federal funds rate of 4.1% at the end of 2026, compared with the current target range of 3.75%–4.00%. That projection is consistent with additional tightening if economic conditions develop broadly as officials expect. 

The projected policy path also changed noticeably from June, when officials had expected a median year-end rate of 3.8%. For 2027, the new median projection remains at 4.1%, suggesting policymakers currently expect rates to stay relatively elevated for an extended period. These projections represent individual officials’ assessments rather than a commitment to a predetermined path.

Markets Turn to the Fed’s Next Move

The rate increase comes at a sensitive time for financial markets, with investors balancing inflation risks against the potential impact of tighter monetary policy on economic growth.

Higher policy rates can feed through to borrowing costs across the economy, affecting mortgages, corporate financing, consumer credit and investment decisions. At the same time, expectations for future Fed policy remain an important driver of the US dollar, Treasury yields, equities and commodities.

For now, the September decision marks a significant shift in US monetary policy. After more than 3 years without an increase, the Fed has returned to raising rates as it seeks to bring inflation back towards target while navigating an economy that has remained comparatively resilient.

The focus now turns to incoming inflation, employment and growth data, which will help determine whether policymakers proceed with further tightening at upcoming meetings.

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