By Michael S. Derby
WASHINGTON, Sept 16 (Reuters) – Federal Reserve officials expect one more interest rate increase this year after raising rates on Wednesday and expect to hold them steady in 2027, quarterly projections released after their latest policy meeting showed.
At the same time, policymakers also marked up their near-term inflation outlook.
The forecasts were released as policymakers raised the target rate for fed funds by a quarter of a percentage point to 3.75%-4.00%, which was widely expected. Their new forecasts see rates coming back down in 2028 and for the federal funds rate to stand at between 3.50% and 3.75% in 2029.
In June, Fed officials in their projections had penciled in one quarter-percentage-point rate rise this year and a cut of the same amount in 2027.
The rate hike was announced as policymakers have been wrestling with inflation that has remained stubbornly high. Since the June 16-17 meeting the issue has only gotten more challenging as price pressures, fueled in part by surging energy costs related to the war in the Middle East, have risen and increased worries that inflation will not moderate to the Fed’s 2% target in a timely fashion.
Officials marked up their long-run expectation of the federal funds rate to 3.2% from the June forecast of 3.1%.
The Fed’s forecasts also showed policymakers now expect generally higher inflation for this year and beyond.
For 2026, the median forecast for inflation as measured by the Personal Consumption Expenditures Price Index stood at 3.7%, versus the June projection of 3.6%. Officials still expect the PCE reading to stand at 2.3% next year, with 2028 coming in at 2.1%, compared to June’s forecast of 2%. Officials expect to get inflation back to the Fed’s 2% inflation target in 2029.
“Inflation risks are to the upside,” Fed Chairman Kevin Warsh said in a press conference following the end of the central bank’s policy meeting. In the forecasts, an index tracking inflation uncertainty among policymakers echoed his observation.
‘DISAPPEARANCE OF THE DOVES’
The Fed’s forecasts also showed mostly steady growth and employment outlooks. GDP growth this year is seen at 2.3%, up from June’s 2.2% forecast, and at 2.4% in 2027. The unemployment rate, which is currently at 4.1% as of August, is seen at 4.1% by the end of this year, staying there through 2029.
Eighteen of 19 policymakers submitted forecasts for the interest rate outlook, which strongly suggests Warsh refrained, as he did in June, from offering projections.
The Fed’s so-called “dot plot,” which maps out policymaker views, showed 16 of those officials expect to hike rates this year while two see rates holding steady.
“The striking feature of the dot plot is the disappearance of the doves,” analysts at Evercore ISI said. “The old center dovish majority now lines up behind a limited hawkish mid-cycle adjustment — in their eyes at least likely for risk insurance purposes, though Warsh himself did not use the risk insurance language and preferred a more hawkish framing,” they added.
The Fed’s forecasts face an uncertain future as the central bank has engaged in a formal process that is weighing changes on a broad array of fronts, including how it communicates and considers the data it uses to set monetary policy.
In his post-meeting press conference, Warsh also appeared to put some distance between himself and the entire forecasting exercise.
After recounting some of the projection details, he said, “Those aren’t my forecasts. Those are the forecasts of my 18 colleagues, and I tried to represent them dutifully to you. My business is to not give forward guidance.”
(Reporting by Michael S. Derby; Editing by Andrea Ricci and Paul Simao)
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