The Federal Reserve raised its target range for the federal funds rate by 25 basis points to 3.75% to 4.00% on September 16, 2026. The unanimous decision was the first increase since 2023 and marked a shift from waiting for more evidence to acting against inflation that the Federal Open Market Committee believes has stayed too high for too long.

The decision was more than a response to one inflation report. Chairman Kevin Warsh argued that US growth, employment, business investment, and credit conditions were strong enough to absorb less accommodative policy. He also rejected a preset path for future rate increases. The result is a hawkish policy signal with significant uncertainty around the pace of any further tightening.

For markets, the main question is no longer whether the Fed has started raising rates. It is whether persistent inflation, strong capital demand, and geopolitical pressure keep interest rates and bond yields higher for longer than investors expect. Warsh described the 4.1% unemployment rate as broadly consistent with full employment, pointing to job openings, weekly hours, hiring, private-sector earnings, and unemployment claims as evidence that the labor market was holding up.

Inflation progress was not fast enough. The Fed wanted confidence that underlying inflation was moving toward 2% clearly and at sufficient speed. Warsh estimated that August headline PCE inflation was running near 3.6%, citing core PCE near 3.2% and CPI near 2.4%, while warning that too many categories were still rising by more than 3% over six-month and twelve-month periods.

The September Summary of Economic Projections changed the expected policy path. The median FOMC participant projected real GDP growth of 2.3% in 2026 and 2.4% in 2027, PCE inflation of 3.7% in 2026 and 2.3% in 2027, and a federal funds rate of 4.1% at the end of both 2026 and 2027.

Five signals from the press conference stand out. First, the Fed does not consider the previous stance clearly restrictive. Second, future decisions will not follow a preset sequence. Third, the Fed wants markets to stop overreacting to individual releases. Fourth, higher long-term yields are not only a Fed story. Fifth, AI affects both demand and supply.