On Our Minds September 2026 FOMC Postmortem The First Hike

On Our Minds September 2026 FOMC Postmortem: The First Hike

Jan Groen The September FOMC delivered a hawkish message, raising the Fed funds rate by 25bp to Chief US Economist %-4% and signalling increasing concern about the broad-based nature of inflation. The updated SEP reinforced this shift, with stronger growth, a lower unemployment-rate outlook, higher inflation projections and a median policy path consistent with further tightening. Chair Warsh’s press conference underscored the Committee’s focus on persistent inflation and his view that policy remains accommodative. We continue to expect two additional 25bp rate hikes in December and March, with the Committee likely to coalesce around removing the accommodation from the 2025 insurance cuts, though the wide dispersion in the 2027 dot distribution highlights growing disagreement about how much further tightening may ultimately be required.

The Rate Decision and Statement In with SG and consensus expectations, the FOMC decided to raise its Fed funds target range by 25bp to 3.75% - 4%, without any dissenters. The statement’s language on inflation was the main change, as it changed from “Inflation remains elevated relative to the Committee's 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy.” to “Inflation remains elevated. Today's policy action will support a timelier return to the Committee's 2 percent goal.”. By de-emphasizing the temporary factors from energy price shocks when considering elevated inflation, the Fed signalled it’s now more worried about how broad- based the pickup in inflation has become. A clear signal that more hikes are in the pipeline.

The SEP Update At this meeting we also had an update of the Summary of Economic Projections (SEP). As before the Chair did not submit forecasts. Overall, the SEP update came in line with the SG expectations in the September FOMC preview. In terms of the economic forecasts, GDP growth for this and next year were revised up 10bp to 2.3% and 2.4%, respectively. The unemployment rate forecast for revised down notably to 4.1% for all of 2026 through 2029 – below the Fed’s long-run estimate of 4.2%. Core PCE inflation for 2026 was revised up again from 3.3% in June to 3.4%, closer to our own forecast of 3.5% for this year, whereas the median forecast for 2027 remained at 2.5%.

FOMC Continues to See Upside Risks to Core PCE Inflation Risks to the Unemployment Rate Outlook Skewed to Downside

18 Number of Participants 18 Number of Participants 16 Mar. 26 SEP June 26 SEP 16 Mar. 26 SEP June 26 SEP 14 Sep 26 SEP 14 Sep 26 SEP 12 12

0 0 Downside Balanced Upside Downside Balanced Upside

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Source: SG Cross Asset Research/Economics Source: SG Cross Asset Research/Economics

The SEP continued to show that most FOMC members see upside risks to core PCE inflation. In case of the unemployment rate outlook, however, none of the Committee members see downside risks in their outlook. So, many Fed officials have become more upbeat on the unemployment rate outlook, which signals that the Committee sees less risks of a stagflationary outcome. Inflation risks are now squarely the focus for monetary policy, while the employment side of the Fed’s mandate, for now, not perceived to be a main issue.

FOMC 2026 Rate Distribution Implies Another 2026 Hike Likely More FOMC Disagreement about the 2027 Policy Rate Path

14 Number of Participants 9 Number of Participants 8 12 Mar. 26 SEP June 26 SEP Mar. 26 SEP June 26 SEP Sep 26 SEP 7 Sep 26 SEP 10 6 8 5

0 0 2.00<= >=4.50 2.00<= >=4.50 Source: SG Cross Asset Research/Economics Source: SG Cross Asset Research/Economics

The SEP projections for the Fed funds rate were very much spot on with our predictions in the FOMC preview. The median dot for 2026 now signals a total of 50bp hikes compared to a 25bp increase in the June SEP, and looking at the distribution 12 of the 19 members aligned themselves with that view (left-hand side chart above). For 2027 the median dot signals a hold but looking at the underlying…