The Fed Just Hiked Rates for the First Time in Three Years. The Dot Plot Is What Kept Me Up.

Fed restarts rate hikes: dot plot puts “higher for longer” back on the table

On September 16, 2026, the Federal Reserve raised the target range for the federal funds rate by 25 basis points, to 3.75%-4.00%. The vote was 12-0. This was the first hike since July 2023. Before the decision, market pricing put the probability above 92%. The hike was expected.

The dot plot was not.

The median rate forecast from 18 officials rose from 3.8% in June to 4.1%. Twelve officials expected another 25 basis points this year. Four expected two more hikes. Two expected no further move. The median forecast for 2027 rose from 3.6% to 4.1%. The Fed does not plan to cut rates next year.

Warsh’s press conference remarks were brief: “Inflation is too high, and it has been too high for too long.” He said the Fed cannot influence oil and food prices, but it can keep price increases from passing through. He gave no forward guidance. Wall Street read the silence as a refusal to promise that one hike would be enough.

Why hike now?

Three pressures pushed the Fed.

Inflation is the first. Geopolitical conflict has raised energy prices. U.S. inflation is not falling fast enough. The policy statement said the current rate is still not enough to suppress inflation.

Employment is the second. The economic projections cut the median unemployment rate for this year from 4.3% to 4.1%. The job market has not collapsed. Economic data are broadly positive. The Fed has room to focus on inflation.

The bond market is the third. The 10-year Treasury yield had already broken above 5% before the decision, the first time since 2007. The 2-year rose to 4.63%, a high since mid-2024. Treasury interest costs are rising. Pressure from the Trump administration is also rising. The Fed chose to fight inflation first.

Immediate market reaction

The dollar index rose about 40 points in the short term to 99.89, then closed up 0.68% at 100.294. Gold fell nearly $60.

The Dow fell 1.21%. The S&P 500 fell 0.44% to 7551.81. The Nasdaq was roughly flat. The Philadelphia Semiconductor Index had already fallen nearly 6% the trading day before the decision. ASML dropped more than 7%. ARM dropped nearly 10%. Rate-sensitive growth stocks were cut first.

The bond market moved most. The 10-year Treasury yield broke 5%. The 2-year was at 4.63%. The curve shifted higher overall. That raises the discount rate for global risk assets.

The Hong Kong Monetary Authority announced a 25 basis point hike on the 17th. Under the linked exchange rate system, Hong Kong imports U.S. rate policy.

How many more hikes?

Traders price about 28 basis points of additional tightening this year. The probability of another hike in December is close to fully priced. CITIC Securities and Yuekai Securities both expect a 25 basis point hike in December, bringing the rate to 4.00%-4.25%.

After that, three variables matter.

The first is the Middle East and oil prices. If energy prices fall, inflation pressure will ease.

The second is core PCE. If it keeps coming in above expectations, the four officials in the dot plot who want 75 basis points of hikes will become the bellwether.

The third is AI capital spending. Investment in data centers and computing infrastructure is not sensitive to higher rates. Heavy issuance of AI bonds is also pushing long-term rates higher. The Fed can set the price of money. It cannot decide who borrows.

Real economy: uneven pressure

The impact of this hike on the real economy is uneven.

The housing market is already under pressure from high rates. The 30-year mortgage rate is elevated. Another 25 basis points raises monthly payments for first-time buyers.

Credit card users are also under pressure. TransUnion estimates that a consumer with an average credit card balance of $6,610 and an annual rate of 22% will see the minimum monthly payment rise by about $1.38. Over the next 12 months, credit card users will pay about $2 billion more in interest.

Commercial real estate loan delinquency rates are above the ten-year average. Property valuations are falling. Refinancing capacity is being squeezed.

AI-related capital spending has not been suppressed by higher rates. Demand for data centers and computing infrastructure is strong. Traditional consumer credit and housing are held down. The AI sector continues to expand.

For global markets

The dollar is stronger. If hike expectations persist, the dollar has support.

Treasury interest costs are rising. The 10-year yield is above 5%.

U.S. equities are under short-term pressure. Over the medium term, flows matter. Higher yields on dollar assets widen the rate differential with other economies. Capital has an incentive to keep flowing into the United States. The post-AI U.S. equity boom has funding support.

Gold and other precious metals are weak. Oil is more affected by geopolitics and supply-demand.

For China

The impact is manageable. Three channels matter.

The first is the exchange rate. A stronger dollar may change the recent trend of RMB appreciation. The RMB will balance China’s trade surplus and capital flows. The range to watch is 6.70-6.80.

The second is capital flows. A hike draws capital to the United States. The effect of 25 basis points is limited. If hikes continue, capital flow trends will become more obvious. Foreign ownership in A-shares is not high. Domestic monetary policy is moderately loose. External tightening does not create substantial pressure.

The third is policy space. The Fed keeping rates high compresses room for domestic monetary easing. Aggregate easing tools will be used more cautiously.

In September 2024, China’s capital market bull run began. The Fed began cutting rates then. Now the Fed has turned. The two are not closely related. China’s market still turns on domestic fundamentals and policy.

For investors

Do not guess whether the next meeting will hike. Re-examine duration risk and credit exposure. In a rate environment above 4%, any model that assumes rates will soon fall back needs to be rewritten.

Core PCE before the December meeting is the next data point to watch.