The Federal Reserve raised the federal funds rate by 25 basis points at the conclusion of its September policy meeting, bringing the target range to 3.75% to 4%. The decision comes amid renewed inflation concerns and an increase in long-term interest rates. Notably, the decision was unanimous 12-0 vote, reflecting a unified view to tackle renewed inflationary pressures.
With respect to economic conditions, the Federal Open Market Committee (FOMC) stated that “economic activity is expanding at a solid pace.” In fact, the Fed slightly upgraded its growth projections, and Chairman Warsh noted that the demand for capital has increased, leading to higher market interest rates. Additionally, the FOMC noted that “uncertainty remains elevated” due to “geopolitical developments,” which is a nod to current trade issues and the Iran war.
On inflation, the FOMC stated simply that “inflation remains elevated.” The Fed noted that today’s hike, which is in response to inflation rising to a 3.4% year-over-year rate, “will support a timelier return to the Committee’s two percent goal.” Echoing recent statements from Chairman Warsh, President Trump’s pick to lead the Fed, today’s statement repeated that “the Committee will deliver price stability.”
Today’s hike reflects a difficult policy environment. Long-term interest rates have increased in recent weeks as corporate firms issue more debt to finance technology investment and growth, while concerns persist over long-term federal budget constraints, and, most particularly in the short run, oil prices rise due to the Iran war. Together, these forces have increased financing costs for households and businesses, including home buyers and home builders.
The prior case for holding rates steady, or at least moving slowly, rested on the source of recent inflation. To the extent that higher prices reflected one-off adjustments, the Fed could potentially “look through” these increases rather than respond to each change with tighter policy. An increase in the price level does not necessarily imply a persistently higher inflation rate.
This distinction is particularly relevant for housing. While the central bank’s federal funds rate does not have a direct effect on mortgage rates, an increase in the funds rate does increase the cost of financing for builder acquisition, development and construction (AD&C) loans. Higher borrowing costs make it more difficult to finance new construction and reduce the purchasing power of prospective buyers via higher construction costs. Slower home building limits progress in addressing the housing affordability crisis, an underlying source of pressure on shelter costs and the problem of overall inflation.
Today’s Fed hike did not measurably change long-term interest rates, including the critical 10-year Treasury rate, as much of the increase was already priced into markets. The last few weeks of bond market changes suggest investors are demanding higher yields in response to inflation risks and other pressures. If higher energy prices begin to affect broader price-setting behavior and inflation expectations, waiting for conclusive evidence could leave the central bank with more work to do later. Additional constraints on oil products are a key concern whereby interest rates could move even higher.
Looking forward, the September SEP (Summary of Economic Projections) indicates a slightly stronger growth outlook relative to June. The median projection for real economic growth in 2026 is 2.3%, measured on a fourth-quarter-over-fourth-quarter basis, compared with 2.2% in June. (NAHB is forecasting 2.1% for 2026.) Growth is expected to register 2.4% in 2027 and 2.2% in 2028, with the newly added 2029 projection at 2.1%. The unemployment rate is projected to average 4.1% in the fourth quarter of 2026 and 4.1% in late 2027, suggesting tempered labor market conditions in the current “low hire, low fire” environment.
The median forecast for headline personal consumption expenditures (PCE) inflation in 2026 is 3.7%, while core PCE inflation, which excludes food and energy, is projected at 3.4%, compared with 3.3% in June. Core inflation is expected to decline to 2.5% in 2027 and 2.2% in 2028. The projections indicate a return to the Fed’s two-percent inflation objective in 2029. The process of getting to the Fed’s policy target will thus take more time given the number of supply-shocks affecting the U.S. economy. (It is worth noting that Chairman Warsh did not participate in the September SEP.)
With respect to monetary policy, the updated dot plot indicates a median federal funds rate of 4.1% at the end of 2026, implying one more rate hike in 2026 following today’s increase. The median projections for year-end 2027 and 2028 are 4.1% and 3.9%, respectively, with a 2029 projection of 3.6%. The longer-run rate estimate was revised higher to 3.2 compared to 3.1% in the June SEP.
Today’s outlook suggests an additional rate hike in December, with either flat conditions in 2027 or a combination of an additional hike and then an offsetting cut that year. These projections are conditional outlooks, rather than commitments.
There was also an important omission from today’s communications: the Fed did not discuss changes to balance sheet policy. This is relatively good news for the mortgage sector and home builders. Accelerated reductions in the Fed’s securities holdings, particularly mortgage-backed securities, would place additional upward pressure on mortgage rates.
For housing, the path of long-term rates, and the energy, fiscal and investment pressures influencing those rates, will remain critical in the months ahead.