Fed Dot Plot Signals Possibility of Another Rate Hike Next Year

The Federal Reserve signaled it remains open to another interest-rate increase next year even as it expects inflation to cool.

The dot plot released by the Fed on Sept. 16 showed the median forecast for the benchmark rate at the end of this year and next year at 4.1% in both cases. A closer look at the individual projections, however, showed at least four officials expected rates to be higher at the end of next year than at the end of this year. That means the dot plot included a case for additional tightening that was not visible from the median alone.

The Fed raised its target range for the federal funds rate by 25 basis points to 3.75% to 4.00% at its Federal Open Market Committee meeting on Sept. 16. It was the first increase since July 2023, and all 12 voting members supported the move. Fed Chair Kevin Warsh said inflation had remained too high for too long, adding that recent data alone were not enough to conclude the trend had clearly improved.

The latest dot plot included projections from 18 FOMC participants. Four officials projected the policy rate at 4.375% at the end of this year, while eight put it at the same level for the end of next year. Even assuming the four officials who forecast 4.375% for this year kept that same view for next year, at least four participants still expected rates to be higher next year than this year.

By contrast, four officials projected the rate at 3.625% or lower by the end of next year. Because the lowest forecast for the end of this year was 3.875%, that implies at least four participants expected rate cuts next year. Across all possible combinations, the number of officials expecting rates to be higher next year is estimated at four to 10, while those expecting lower rates are estimated at four to eight.

Those projections for additional hikes came even though all Fed officials expected inflation to slow next year. Their forecasts for personal consumption expenditures inflation this year ranged from 2.9% to 3.8%, falling to 2.0% to 2.6% next year. The figures suggest some officials judged that further tightening would still be needed to bring inflation back to target, rather than anticipating a renewed pickup in prices.

The Fed's room to raise rates has been supported by resilient employment and growth. U.S. nonfarm payrolls increased by 162,000 in August from the previous month, while the unemployment rate held at 4.1%. The Fed also raised its growth forecasts to 2.3% for this year and 2.4% for next year, while lowering its unemployment-rate forecast to 4.1%.

The bond market is also reflecting the possibility of further tightening. The yield on the 10-year U.S. Treasury reached 5.00% on Sept. 15, up 0.17 percentage point from Sept. 9. In the market, the view is that this increase is unlikely to be the last, though whether it develops into a prolonged hiking cycle will depend on how quickly inflation slows.