The Federal Reserve raised its target range for the federal funds rate by 25 basis points on 16 September 2026, taking it to 3.75%-4.00%. It was the first increase since July 2023 and the first move under a new Fed leadership. The vote was 12-0, with no dissents, which is itself notable given that the July 2026 meeting produced three votes against holding rates. The Board also raised the interest rate paid on reserve balances to 3.90% effective 17 September.
Chart: FOMC statement and implementation note, 16 September 2026. Chart by Investory Spot.
The statement language
The FOMC statement describes economic activity as “expanding at a solid pace”, domestic spending as “resilient”, productivity growth as “strong” and capital investment as “robust”. Job gains have kept pace with the workforce and the unemployment rate has “changed little”. Then, directly: “Inflation remains elevated. Today’s policy action will support a timelier return to the Committee’s 2 percent goal.”
That is an unusually blunt characterisation. It is also the whole story. The Fed is not hiking because of growth; growth is a reason not to cut. It is hiking because inflation has not come down on the timetable the committee expected.
Reading the dot plot
- 16 of 18 participants expected at least one further rate increase.
- 4 of those 16 saw two or more increases as possible.
- 2 participants expected the committee to stop after one hike.
- 2027 was close: 8 officials projected a hike, 6 a hold and 4 cuts.
- No increases were projected for years beyond 2027; one cut each indicated for 2028 and at least one for 2029.
- Inflation is not expected back at target until 2029, with 2027 projected at 2.3% headline and 2.5% core.
The chairman was explicit at the press conference, saying inflation had been too high for too long and that the committee needed confidence that underlying inflation was moving to objective clearly and at sufficient speed. The standards for that confidence had not been met.
Implications for the dollar
The carry argument is weaker than it looks
With the Fed at 4.00% and the ECB now also hiking, the interest rate advantage that supported the dollar for much of 2025 and 2026 is eroding. The dollar index carries a large euro weighting, so the ECB turning is directly relevant to the index level.
A Fed that hikes into rising oil prices faces a growth trade-off
The Middle East conflict is cited by both the Fed and the ECB as a factor keeping inflation elevated. Central banks tightening into an energy shock are tightening into a terms-of-trade loss for importers. The historical pattern is that the currency of the economy most exposed to the shock underperforms even as its central bank raises rates.
The 2027 vote distribution is the key uncertainty
Eight officials projecting a hike against six for a hold and four for cuts in 2027 is close to evenly split. Any single labour-market or CPI print could shift that balance, which makes the dollar sensitive to data in both directions rather than enjoying a one-way policy tailwind.
What to watch into year-end
- The next CPI release, the key input the chairman referenced directly.
- Oil prices, the common channel behind the Fed and ECB projections.
- Wage growth, which determines whether core inflation can reach 2.3% in 2027.
- Any change in the two officials who projected a stop after a single hike.
The dollar’s structural support is intact: US growth is described as solid while several peers are revising down. But the rate-differential cushion that carried the dollar through the first half of 2026 has been punctured from both sides, and the Fed itself does not project inflation back at target until 2029.