Fed Raises Rate by 0.25 Percentage Points, but It Is Not Over—Signals Another Hike This Year

【Financial News, New York = Correspondent Lee Byung-chul】 The United States' central bank, the Federal Reserve System (Fed), raised its benchmark interest rate for the first time in more than three years. The move was exactly in line with market expectations. However, regarding the future path of interest rates—a key focus for the market—the Fed signaled that it could raise its benchmark rate once more this year. Fed Chair Kevin Warsh emphasized that price stability is the foundation of economic growth and said the Fed had taken an important step toward achieving it.
The Fed held a regular meeting of the Federal Open Market Committee (FOMC) on the 16th (local time) and unanimously raised the benchmark rate by 0.25 percentage points. This was the first rate hike since July 2023, bringing the Fed's benchmark rate to 3.75%–4.00%. Warsh said the decision reflected the conclusion that prices were rising too quickly. He said, "The clear fact is that inflation is too high and has persisted for too long."

Recent economic indicators supported the Fed's concerns about inflation. The United States' August Consumer Price Index (CPI) rose 0.4% from the previous month, a sharp acceleration from July's 0.1% increase. It also rose 3.4% from the same month a year earlier, well above the Fed's 2% inflation target. In particular, international oil prices surged amid the war between the United States and Iran, pushing energy prices up 2.1% in August alone and gasoline prices up 3.9%. Energy prices jumped 16.3% from a year earlier.
While inflation was heating up again, the labor market also proved stronger than expected. Nonfarm payrolls increased by 162,000 in August, far exceeding the market forecast of 53,000. Compared with July's 21,000 increase, the gain expanded more than sevenfold. The unemployment rate remained unchanged from the previous month at 4.1%. The rate hike was based on the assessment that, although inflation remained above the Fed's target, the economy and labor market were resilient enough to withstand higher interest rates.

The market's attention focused less on the hike itself than on the future path of interest rates. The Fed officials' new rate projections, released alongside the decision, strongly suggested that the hike might not be a one-time move.
Of the 19 Fed officials who submitted projections, 18 expected the benchmark rate to be at least 0.25 percentage points higher than its current level by the end of this year. In effect, all but one official judged that another rate hike would be necessary this year. Four officials, in particular, projected an additional 0.50-percentage-point increase before year-end. This leaves open the possibility that the Fed could raise rates twice during the remaining period, by 0.25 percentage points each time.
Given that the Fed raised the rate to 3.75%–4.00% that day, most officials effectively expect the year-end benchmark rate to reach at least 4.00%–4.25%. The projections also pointed to the possibility that high interest rates could persist for a considerable period into next year. Although officials' rate projections for 2027 varied somewhat, a majority expected the benchmark rate to remain around 4.00%–4.25%.




[email protected] Correspondent Lee Byung-chul Reporter