Following the Fed’s Interest Rate Decision, Leading Economists Weigh In—What’s Happening?

Following the US Federal Reserve’s (FED) decision to raise its policy interest rate by 25 basis points, initial market reactions and economist assessments have begun to emerge. The US dollar index (DXY) rose above 100 after the decision, crossing this threshold for the first time since August 13th. While the FED implemented its first interest rate hike in three years, the updated dot plot indicates a longer outlook for higher interest rates in monetary policy.

According to the Fed’s new projections, the median expectation among policymakers is for one more interest rate hike in the remainder of 2026 and for the rate to remain at 4.1 percent throughout 2027. Interest rate cuts are expected to begin in 2028, with the federal funds rate projected to fall to the 3.50-3.75 percent range in 2029. The June projections had foreseen one rate hike in 2026 and one rate cut in 2027. The Fed also raised its long-term federal funds rate forecast from 3.1 percent to 3.2 percent.

The dot plot revealed that 18 out of 19 policymakers offered their forecasts, while Federal Reserve Chairman Kevin Warsh, as in June, did not share his individual interest rate forecast at this meeting. Of the 18 officials in the dot plot, 16 projected at least one additional rate hike by the end of the year, while a more pronounced divergence was observed among members regarding their outlook for 2027.

The Fed’s economic projections also indicated an upward revision on the inflation side. The central bank raised its PCE inflation forecast for 2026 to 3.7 percent, while expecting inflation to approach its 2 percent target only gradually in the coming years.

Commenting on the decision, KPMG Chief Economist Diane Swonk said that the pace of wage growth has slowed in some sectors, particularly in AI-related areas. Swonk viewed the Fed’s latest move as the beginning of a broader tightening process, stating, “This is the start of an interest rate hike cycle.” Swonk also said she expects the neutral interest rate to rise, but argued that the current level remains low. While noting the resilience of the US economy, the economist added that this resilience is not felt equally by broad segments of society.

Former Fed Vice Chairman Richard Clarida pointed out that the decision was unanimous. Clarida stated that the 25 basis point increase being approved by a 12-0 vote carried an important message.

*This is not investment advice.