FOMC Raises Policy Rate to 3.75 to 4.0 Percent

The Federal Reserve’s Open Market Committee (FOMC), the rate-setting body that meets roughly eight times per year, raised the Federal Funds rate at its September meeting today in a unanimous, 12-0 vote. The 25 basis point rate hike moved the target range from 3.5 to 3.75 percent to a range of 3.75 to 4.0 percent.

Why a hike was needed

The FOMC made its last move in December 2025 when it dropped rates by a quarter point to the current 3.5 to 3.75 percent ranges. This move capped a series of cuts that dropped the Fed Funds rate nearly 2 percentage points from 5.25% to 5.5% and put the Fed Funds rate into a range that would likely have been considered neutral to slightly restrictive based on member estimates of the long run neutral rate. 

Measured with the benefit of hindsight, the 3.5 to 3.75 percent range looks less restrictive than was likely assumed late last year. Since the rate pause, the economy has added an average of more than 80,000 jobs per month in 2026, and the unemployment rate has slipped from 4.4% in December 2025 to 4.1% in August 2026. By just about every estimation, this is an economy at full employment. 

At the same time, inflation has slowed since May but held steady in August. It remains well above its December 2025 pace and the Fed’s 2% target. Despite confirmation testimony suggesting that he was open to exploring alternative measures, in recent Jackson Hole remarks Warsh reaffirmed the 2% inflation target, as measured by the Personal Consumption Expenditures Index (PCE), is the Fed’s success metric.  

Pressure for a recalibration already existed. At the last Fed meeting in July, three regional presidents dissented from the decision because they preferred to raise rates at that meeting. Recent trends in the labor market and inflation have reaffirmed the position of those presidents and swayed each of the 9 additional voters to support today’s rate hike.

With little forward guidance, FOMC projections may carry weight

This meeting featured an update of the summary of economic projections. With the Fed shying away from forward guidance, markets may read into the economic projections even more than usual for clues about the range of outlooks on the FOMC and, importantly, their reaction functions. Economic growth projections ticked slightly higher as unemployment projections ticked slightly lower compared to June. Inflation projections also edged up for 2026, but remain unchanged in 2027, underscoring the committee’s commitment to bringing inflation back to 2%. Consistent with today’s decision to raise rates, the Fed funds rate projections also rose, by 30 basis points in 2026 and 50 basis points each in 2027 and 2028.

 

What this means for housing, and homebuyers and sellers

This meeting will feature an update of the summary of economic projections. With the Fed shying away from forward guidance, markets may read into the economic projections even more than usual for clues about the range of outlooks on the FOMC and, importantly, their reaction functions. Economic growth projections ticked slightly higher as unemployment projections ticked slightly lower compared to June. Inflation projections also edged up for 2026, but remain unchanged in 2027, underscoring the committee’s commitment to bringing inflation back to 2%. Consistent with today’s decision to raise rates, the Fed funds rate projections also rose, by 30 basis points in 2026 and 50 basis points each in 2027 and 2028.