September FOMC Recap—Bark Becomes Bite

The Fed has shifted from warning about inflation to delivering a more restrictive rate path, but Western Asset believes the yield curve prices more tightening than will ultimately be necessary.

• The FOMC unanimously raised the fed funds target range by 25 basis points to 3.75%–4.00%, the first increase since July 2023 and the first under Chair Kevin Warsh.
• The statement and Warsh’s press conference stressed resilient domestic spending and a stable labor force, while acknowledging that inflation remains elevated and that progress toward the 2% target has been too slow.
• The median dot plot projects one further 25-basis-point hike this year, a year-end funds rate near 4.1%, no change through 2027 and one cut in 2028, removing the cut previously signaled for 2027.
• Although GDP and inflation forecasts rose only slightly from June, the expected policy rate over the next two years is about 50 basis points higher, reflecting resilient economic data, higher inflation and geopolitical pressure on energy and commodity prices.
• CPI-swap inflation expectations fell 4–5 basis points after the announcement but remained near their year-to-date averages; Western Asset expects inflation to decline, though not quickly enough to reach the Fed’s target within a year.

Takeaway: Western Asset expects further hikes but considers it unlikely that rates will reach the level priced into the yield curve; even two additional hikes through 2027 would still leave a neutral environment for U.S. fixed income at current valuations.