Market Commentary: A Dove in Hawk’s Clothing—the Fed Hikes, but It’s Still a Dovish Fed

The Fed’s rate hike is still dovish because its projected policy path remains modest despite stronger growth, hotter inflation, and a tight labor market.

• The Fed raised its benchmark rate by 25 basis points to 3.75%–4.00% in a unanimous 12-0 decision, while the S&P 500 ended the week down less than 0.1%.
• The median projection implies only one more hike in 2026 and none in 2027; the median policy-rate forecast rose to 4.1% from 3.8% in June, and no official expects more than three hikes in total.
• The Fed simultaneously raised its 2026 real GDP growth forecast from 2.2% to 2.3%, lowered unemployment from 4.3% to 4.1%, and raised core PCE inflation from 3.3% to 3.4%.
• Compared with June 2025, the 2026 forecasts show GDP growth rising from 1.6% to 2.3%, headline PCE inflation from 2.4% to 3.7%, and nominal GDP growth from 4.0% to 6.0%, while the policy-rate forecast increased only from 3.6% to 4.1%.
• Markets price a policy rate near 4.3% by year-end and above 4.6% in 2027, versus the Fed’s 4.1% median forecast; the market’s 2031 proxy for the long-run rate is 4.57%, compared with the Fed’s 3.2% estimate.
• AI-capex-driven demand is keeping the economy hot: S&P 500 revenue growth reached 15% year over year in Q2 2026, with Q3 technology revenue expected to grow 40% and semiconductor revenue 80%.

Takeaway: The authors see the dovish Fed as supportive for stocks in the near term, but warn that delaying a stronger response to persistent inflation and AI-related investment could force a more painful adjustment later.