U.S. Fed Raises Interest Rates for the First Time in Three Years; Markets Reel at Signal of 'One More' Hike

【Financial News New York = Reporter Lee Byung-chul】 The Federal Reserve System (Fed), the central bank of the United States, raised its policy 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 markets—the Fed signaled that it could raise its policy rate once more this year. Fed Chair Kevin Warsh emphasized that price stability is the foundation of economic growth and that 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 policy rate by 0.25 percentage points. This was the first rate hike since July 2023, bringing the Fed’s policy 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 U.S. consumer price index (CPI) rose 0.4% in August from the previous month, a sharp acceleration from July’s 0.1% increase. It also rose 3.4% from 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.
As inflation began to flare 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 was more than seven times larger. The unemployment rate remained unchanged from the previous month at 4.1%. The backdrop to the rate hike was the judgment that, while inflation remained above the Fed’s target, the economy and labor market were holding up well enough to withstand higher rates.

Markets 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 policy 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 from the current level 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 policy rate to reach at least 4.00–4.25%. The projections also pointed to the possibility that high rates could persist for a considerable period into next year. Views on the 2027 rate outlook varied somewhat, but a majority expected the policy rate to remain around 4.00–4.25%.

Markets reacted after Warsh’s press conference. When the Fed announced the rate hike, the three major U.S. stock indexes continued to rise steadily, while Treasury yields actually edged lower. However, after Warsh’s strong commitment to curbing inflation became clear, stocks broadly turned lower.
The decline was particularly pronounced for the Dow Jones Industrial Average (DJIA), one of the three major indexes. The DJIA slid 631.21 points, or 1.21%, from the previous session to close at 51,461.90. The Standard & Poor’s 500 Index (S&P 500 Index) fell 33.92 points, or 0.45%, to 7,551.81, while the NASDAQ Composite dropped 3.15 points, or 0.01%, to 25,978.43. The Nasdaq-100 Index, comprising 100 large technology stocks, finished up 72.23 points, or 0.03%, at 28,945.06.
U.S. Treasury yields rose mainly for short- and medium-term maturities. The 10-year Treasury yield rose 0.022 percentage points from the previous session to 5.02%, while the two-year yield, which is highly sensitive to market expectations for Fed policy, surged 0.077 percentage points to 4.74%. In contrast, the 30-year Treasury yield, a benchmark for long-term rates, fell 0.005 percentage points to 5.358%.
Kay Ha, chief investment officer (CIO) for fixed income at Goldman Sachs Asset Management, told CNBC that the Fed did not appear to be anticipating an aggressive tightening cycle at this stage. He said most officials at this FOMC meeting projected one more rate hike this year, adding that he expected the Fed to skip a hike at its October meeting, which is close to the midterm elections, and deliver an additional hike in December.
[email protected] Reporter Lee Byung-chul Reporter