The Federal Reserve raises interest rates by a quarter point and expects another increase before the end of the year

The yield on short-term US Treasury bonds rose after the Federal Reserve decided to raise interest rates by a quarter of a percentage point, with policy makers’ expectations indicating the possibility of another increase before the end of the year, at a time when the central bank kept the door open to tightening monetary policy during the next year.

The Federal Reserve's new forecasts showed that 16 out of 18 officials expect to raise interest rates again by at least a quarter of a percentage point before the end of the year, while only two officials see interest rates remaining at their current levels. Expectations also showed that the interest rate would reach a range of 4-4.25 percent by the end of 2026, while remaining at the same level by the end of 2027.

Following the decision, the two-year Treasury bond yield, which is most sensitive to monetary policy expectations, rose by about 4 basis points to 4.71 percent, after it had declined earlier.

In contrast, the 10-year bond yield fell one basis point to 4.985 percent, and the 30-year bond yield fell 3 basis points to 5.331 percent.

In the stock market, the main indices reduced their gains after the start of the press conference by Federal Reserve Chairman Kevin Warsh, as the Standard & Poor’s 500 rose by about 0.1 percent, and the Nasdaq rose by 0.4 percent.

The dollar index rose 0.5 percent to 100.18, as markets re-evaluated the path of US interest rates after the decision.

Daniel Seluk, head of liquidity and short-term income strategies at Janus Henderson Investors, said that the rate hike was widely expected, but the statement and updated forecasts reinforced the message that inflation remains the focus of the Fed’s attention, and that Wednesday’s increase may not be seen as an isolated step.

He added that the statement carried a noticeably tougher tone, especially with the Federal Reserve raising its assessment of the economy and pointing to the flexibility of domestic spending, the strength of productivity growth, and the continued strength of capital investment.

For his part, Brian Jacobsen, chief economist at Annex Wealth Management, said that the market reaction was relatively limited despite the change in the course of monetary policy, indicating that expectations of another hike this year do not necessarily mean that an increase will occur, as the data may change before the next meeting.

Wednesday's decision showed a consensus within the Open Market Committee, whose 12 members voted in favor of raising the interest rate, compared to the July vote, which ended with 9 votes to maintain the interest rate, compared to 3 votes in favor of raising it.

US Federal Reserve Chairman Kevin Warsh said that inflation is still too high for the central bank to consider that its path toward its 2 percent target is proceeding at the required speed, stressing at the same time that the US economy remains flexible and the labor market is in good shape.

Warsh explained, during his press conference following the Fed’s decision to raise interest rates by a quarter of a percentage point to a range of 3.75-4 percent, that “inflation is very high, and it has always been so,” noting that the summer data did not provide evidence of an improvement in the inflation situation.

He added that the Fed must be confident that core inflation is moving towards the 2 percent level “at the appropriate time,” and that the Open Market Committee concluded that this condition has not yet been achieved.

On the other hand, Warsh described the US economy as “resilient,” pointing to the strength of credit flows and the improvement of a number of economic indicators in recent months. He said that the economy “seems to be getting stronger” at the time when the Federal Reserve made its decision to raise interest rates.

Regarding the labor market, Warsh said that the unemployment rate is still low, while job vacancies and working hours are increasing, adding that the labor market aspect, within the federal mandate, is “in a good position.”

Regarding financial conditions, Warsh said that “it is difficult for him to consider financial conditions restrictive,” noting that this opinion was widely shared within the Open Market Committee. He added that credit flows remained strong.

Warsh said that the risks associated with inflation tend to the upside, while the labor market risks appear balanced, stressing that “the Federal Reserve’s primary focus is on price stability.”

He pointed out that the committee’s decision removed “a degree of easing” from monetary policy, after the committee had expressed in July a joint willingness to act.

Warsh revealed that he did not present an individual prediction of the path of interest rates within what is known as the “dot chart” at the September meeting, at a time when the new expectations of policymakers showed that the majority of committee members expect another interest increase before the end of the year.

He said that there are a “very large number” of price categories that record increases exceeding 3 percent on a six- and 12-month basis, considering that this does not yet support a rapid and sustainable return of inflation to the “Federal” target of 2 percent.