The Federal Reserve raised its benchmark rate a quarter point to 3.75%-4.00% on Wednesday, its first hike since July 2023, and signaled at least one more increase this year. Fed Chairman Kevin Warsh said the resulting climb in bond yields reflects economic strength and surging capital spending, not doubts about the central bank's inflation fight.
The Federal Reserve raised its benchmark interest rate 25 basis points to a range of 3.75% to 4.00% on Wednesday, its first increase since July 2023, on a unanimous vote with no dissents. The Federal Open Market Committee cited elevated inflation alongside solid economic growth, strong productivity, and job gains keeping pace with the workforce.
Fed signals more tightening through 2026
The committee's updated projections point to further hikes this year. The median dot implies one additional rate increase in 2026, though the panel is split: twelve participants expect two hikes in total, four expect three, and two see Wednesday's move as the only one needed. Policymakers also lifted their longer-run neutral rate estimate to 3.25%, up from 3.06%, pointing to less room to eventually cut rates back toward pre-pandemic levels.
Alongside that, the median 2026 forecast for core inflation rose to 3.4%, with headline inflation seen at 3.7%, before both measures ease toward roughly 2.1% and 2.2% by 2028. Growth forecasts were nudged higher too, with GDP now expected to expand 2.3% in 2026 and 2.4% in 2027, while the unemployment forecast was lowered to 4.1% across 2026 through 2028.
Warsh ties yields to capital spending, not inflation fears
Speaking after the meeting, Warsh said the rise in bond yields owes to economic strength and surging capital expenditures rather than a loss of confidence in the Fed's inflation fight. He said hyperscalers raising funding in the market mean the competition for capital is real, and pointed to unsettled political factors around the world as another driver of borrowing costs. According to Reuters: "The situation in hotspots around the world are driving long-term yields".
New York Fed President John Williams voiced a similar view earlier in the month, telling CNBC that strength in the economy and heavy investment in AI and data centers were behind the rise in yields. Warsh's list of drivers left out worries about the sustainability of U.S. deficits, even as U.S. government debt has cracked $40 trillion.
Sources: Investinglive, Investing.com
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