It sure looks like the Federal Reserve isn’t done raising rates this year.
Sixteen of the 19 participants in the rate-setting Federal Open Market Committee last week said they anticipate higher rates in 2026. Two foresaw steady rates, and Fed Chairman Kevin Warsh did not give a projection.
The financial world also expects more increases.
“Today’s meeting marked the start of a rate hiking cycle,” said Diane Swonk, chief economist at KPMG, after the Fed last week increased its target rate for the first time in more than three years.
Stubborn inflation was the reason the Fed agreed to an increase to a range of 3.75 percent to 4 percent, as price increases show no signs of slowing.
Higher energy prices continue to trickle down into the broader market, inflating the cost of many goods. The August Consumer Price Index showed energy costs rose 2.1 percent during the month and were up 16.3 percent from a year earlier. Gasoline was up 27.4 percent.
“The scale of ongoing geopolitical escalations makes meaningful price relief unlikely in the near term," said Patrick De Haan, head of petroleum analysis at GasBuddy, which tracks fuel prices. "Motorists should brace for continued volatility ahead.”
Warsh’s view
The Fed has long sought an annual inflation rate of 2 percent. It relies largely on the Personal Consumption Expenditures index, which in July indicated an annual rate of 3.7 percent.
Warsh made it clear at his news conference last week that that figure must come down. But he was also circumspect about how much the Fed would push toward that goal.
While he noted that the economy continues to grow and unemployment remains at a low level, Warsh said, “The plain fact is that inflation is too high and has been for too long. This summer’s inflation readings do not tell me that underlying trends have meaningfully improved.”
He would not get specific about what’s next.
“I'm not in the forward-guidance business," he said. "The decision we made today was a sober decision, serious decision, responsible decision, one that we have been preparing for and thinking about in my 110 or 120 days here.”
Warsh acknowledged the views of his colleagues, but added, "I'm not going to pre-judge any future decisions we make. ... I committed to a discipline, a set of principles. I committed to look outside the window and see what I can observe.”
Warsh was nominated for the chairmanship by President Trump, who has insisted for some time that rates should come down. Trump made that point again after the Fed decision, and other Republicans joined in.
“This is the wrong decision for working families that will only prolong the high costs they are paying,” said Rep. Jason Smith, a Missouri Republican who chairs the tax-writing Ways and Means Committee.
Few experts see the historically independent Fed bowing to political pressure. The title of Swonk’s post-FOMC analysis was “Warsh asserts Fed’s independence."
Will prices stabilize?
Obviously, a quarter-point rate increase won't have much impact on the geopolitical turmoil driving energy prices up. What the FOMC action could do is discourage price increases for non-energy goods and services.
“Fed rate hikes won’t stop inflationary pressures from higher gasoline and diesel prices and are unlikely to slow the AI buildout, which is putting upward pressure on prices,” said Michael Pearce, chief U.S. economist at Oxford Economics. “But by slowing activity elsewhere in the economy, they’ll contribute to a slowdown in broader price pressures. If the breadth of inflation narrows over the coming months, that’ll be a sign that rate hikes are having their intended effect.”
Warsh, Swonk said, “is clearly signaling a faster return to price stability; it is unclear that can be achieved without hitting demand harder.”
Not all analysts see future rate increases as a good idea.
Mark Zandi, chief economist at Moody’s Analytics, agreed that higher energy prices, along with the Trump administration’s tariffs, are “supply shocks that rate hikes can’t fix and that should fade on their own so long as inflation expectations stay anchored, as they have.”
Higher rates, he said, risk “igniting a self-reinforcing negative cycle,” meaning that as prices cool demand, unemployment could result.
The Fed meets next on Oct. 27 and 28, then again on Dec. 8 and 9. Most analysts see the December meeting as the one to watch, since the FOMC wants time to assess its latest action and is also unlikely to raise rates just days before the midterm elections.
CME FedWatch, which uses market predictions to assess the likelihood the Fed will act on interest rates, found Tuesday that only 12 percent of interest-rate traders predict the FOMC will not increase rates at that December meeting.
