TMAD Update: Fed Guidance, More Market Independence
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Hi everyone,
The Fed kept the federal funds rate unchanged at 3.50%–3.75%. The vote was unanimous. No surprise on the rate itself.
Higher Rates for Longer
The Dot Plot update shows that the Fed now expects to keep interest rates higher for longer than it previously anticipated.
The median projection for the federal funds rate in 2026 was raised from 3.4% to 3.8%.
The forecast for core PCE inflation in 2026 was increased from 2.7% to 3.3%.
The Fed believes inflation will remain more persistent than it expected just a few months ago. Because of this, officials now see the need to hold interest rates at higher levels for a longer period to bring inflation back down to their 2% target.
The Fed is signaling that rate cuts will likely come later and be more gradual than markets had been pricing in. This is the main reason markets reacted negatively to the projections.
Fed Remarks:
Economy is growing at a solid pace, despite uncertainty from the Middle East conflict.
Productivity and investment remain strong.
Labor market is stable — job gains match workforce growth and unemployment is little changed.
Inflation is still too high, mainly due to supply shocks including higher energy prices (Iran conflict).
Their projection is that inflation will be back at target in 2028 but that requires rates to stay higher through 2027.
Important Change
