The Fed’s credibility hike

The Federal Reserve’s rate increase is intended to restore its inflation-fighting credibility and is unlikely to be a one-off move.

• The FOMC unanimously raised its policy-rate range to 3.75%-4.00%, its first hike in three years, while a majority of voters favored another increase on December 9 and four supported an additional hike on October 28.
• Two-year Treasury yields rose to around 4.75% from 4.10% in late June, markets priced an 80% chance of at least one further hike by year-end, and traders anticipated three more quarter-point increases by mid-2027.
• The 10-year Treasury yield reached 5.02%, a 19-year high, compared with 4.35% in late June, reflecting expectations that the Fed may reverse its three insurance cuts from the second half of 2025.
• Core CPI inflation fell to 2.4% year over year in August 2026 from a 6.6% peak in September 2022, but monthly core CPI accelerated to 0.3% from 0.2% in July amid energy-price pressures linked to the Iran war.
• The Fed raised its 2026 core PCE forecast to 3.4% from 3.1% in June, kept its 2027 forecast at 2.5%, and projected 2.2% for 2028 and 2% for 2029; it also raised its 2026 GDP-growth forecast to 2.3% and lowered unemployment to 4.1%.

Takeaway: Investors should expect tighter policy and elevated bond yields if the Fed judges that energy shocks, tariffs and AI data-center investment are embedding inflation, although rate hikes cannot directly resolve those supply-side pressures.