The Fed hikes rates! But the real story is that they likely aren't done

The Federal Reserve made it official yesterday - we are back in tightening mode.

The Federal Reserve raised interest rates for the first time in three years in a unanimous decision on Wednesday, with central bankers now seeing a second hike this year to arrest sticky inflation.

The Federal Open Market Committee voted to raise its benchmark interest rate to the range of 3.75% to 4% from 3.5% to 3.75%, the first rate hike since July 2023, as renewed tensions in the Middle East drive oil prices higher and raise concerns about broadening price pressures.

"We now have data broadly defined that says the economy has indeed strengthened," Fed Chairman Kevin Warsh said in a press conference following the meeting. "Underlying growth is higher. Inflation is the problem. Stable prices have been the problem for, now, more than five and a half years.

"So what the committee decided to do today was take an action to ensure a timely return to our price stability."

The ¼ point increase in the Fed Funds rate was expected. The bigger news is what Fed officials projected going forward for both rates and the economy as a whole. And once that information sunk in, Wall Streeters didn’t like it, with only half of those losses being recovered on Thursday.

So what freaked out Wall Street so much? It was a majority of Fed officials saying they are not one-and-done on rate hikes.

Most Federal Open Market Committee members see the need for at least one more 25 basis point rate hike this year, as 12 out of 18 members that submitted projections pegged their view of appropriate monetary policy in 2026 at an average of 4.125%.

That rate implies one more 25 basis point hike to come by year-end.

Four committee members see 50 more basis points' worth of rate hikes in 2026 as appropriate, while only two members see no more hikes this year — suggesting that the new effective target rate of 3.75% to 4% is adequate.

And that outlook was made because the Fed estimates inflation and the US economy as a whole to run hotter than what was expected 3 months ago.

Fed officials added that they expect unemployment to stay at or barely over 4% over the next 2 years. As we’ve found out in Trump 2.0, that doesn’t necessarily mean jobs will be added, but the lack of increases in the labor force and theft growth of productivity may be a trend that continues.

Another trend that seems to be continuing is Americans spending almost all of the money they make, which is also something that leans toward more rate hikes. On the morning of the Fed’s decision, the Census Bureau reported that retail sales had an especially strong August.

U.S. retail sales rebounded sharply in August as households boosted purchases of a range of goods while also spending more at restaurants and bars, reinforcing the economy's resilience even as consumers grow more anxious about high inflation.

The stronger-than-expected report from the Commerce Department on Wednesday prompted economists to upgrade their gross domestic product growth estimates for the third quarter. Inflation jitters were underscored by news of a surge in import ‌prices last month amid strong increases in the costs of capital and consumer goods….

"The pace of underlying consumer spending looks to be advancing at a healthy rate," said James McCann, senior economist at Edward Jones. "This should help​provide some reassurance around the resilience of the U.S. economy in the face of increasing short-term headwinds to growth, including higher interest rates, a renewed spike in oil prices, trade disruptions and waning support from tax cuts."

Retail​sales jumped 1.2% last month, the largest increase since March, after a revised 0.5% drop in July, the Commerce Department's Census Bureau said. Economists polled by Reuters had forecast ⁠retail sales, which are mostly goods and are not adjusted for inflation, would rebound 0.8% after a previously reported 0.6% drop in July.

Yes, some of that was due to the increase in gas prices that started in August, but retail sales also went up 1.1% if you take away gas stations, including a 1.2% increase at bars and restaurants, so Americans were still going out and spending as Summer wound down, even as consumers say they are increasingly gloomy.

The data so far shows a US economy that was still growing in Q3 2026, and the Federal Reserve sees the higher prices as the threat to the economy, and any slowdown would be as a result of spending not keeping up with the higher prices vs slowing down on its own. Of course, we’ll see if and when consumers stop accepting these higher prices, or if we higher interest rates bite back on an AI Bubble of investment that has heavily relied on debt as well as future revenues coming in to pay back that debt.

But on the spending and output side, nothing to worry about folks! At least until something comes along to change that situation.