Federal Reserve hikes rates as inflation risks outweigh employment concerns

The Federal Reserve just did something it hasn’t done in over three years: raise interest rates. The FOMC voted unanimously on September 16 to lift the federal funds rate by 25 basis points, pushing the target range to 3.75%-4.00%. It’s the clearest signal yet that the central bank views sticky inflation as a bigger threat than any cooling in the job market.

Richmond Fed President Thomas Barkin put it plainly. The Fed raised rates because inflation risks outweigh employment risks.

The numbers behind the decision

Headline PCE inflation currently sits at 3.7%, with core PCE at 3.4%. Both figures remain well above the Fed’s 2% target.

On the employment side, the unemployment rate projection was revised lower to 4.1%, suggesting a labor market that’s still holding up. That durability gave policymakers the confidence to tighten, reasoning that workers can absorb higher rates without triggering a painful downturn.

The Summary of Economic Projections paints a cautiously optimistic picture. Growth forecasts were upgraded, and the median dot plot suggests the federal funds rate could reach 4.1% by the end of 2026.

In fact, 16 of the 18 FOMC participants expect at least one more 25 basis point increase before 2026 wraps up. The committee voted 12-0 on this move.

What’s driving the inflation anxiety

The culprits are familiar: geopolitical tensions and supply chain disruptions. These external supply shocks have kept upward pressure on prices even as domestic demand management tools, like rate policy, have been deployed aggressively in past cycles.

Market fallout is already visible

The bond market has responded predictably. The 10-year Treasury yield has climbed above 5%, a level that carries real consequences for everything from corporate debt to government borrowing costs. Mortgage rates are nearing 7%, squeezing an already strained housing market.

For investors, the math has changed. A 5% yield on relatively safe government bonds creates genuine competition for capital that might otherwise flow into riskier assets.