US Returns to the 4% Rate Era for the First Time in Three Years

Mortgage Loan Shock in South Korea

Fed Raises Benchmark Rate by 0.25 Percentage Point

Warsh Tightens Four Months Into His Term

"Inflation Has Stayed Too High for Too Long"

Odds of Another Increase This Year Rise

The Federal Reserve has moved to rein in inflation, which has remained above its 2% target for more than five years. On September 16, the Fed raised its benchmark interest rate by 0.25 percentage point for the first time in three years and two months. Fed Chair Kevin Warsh and other Federal Open Market Committee members also signaled that another increase this year is possible.

The Fed said policymakers unanimously agreed at the September 15-16 FOMC meeting to raise rates by a quarter point. That took the federal funds rate to 3.75% to 4.0%.

The central bank cited inflation stuck in the 3% range and geopolitical uncertainty, including the war in the Middle East, as reasons for the increase. It described consumer spending as resilient and productivity growth as strong. Investment remained active, and employment gains tracked the size of the labor force. The message was clear: the economy can withstand higher borrowing costs.

The dot plot released the same day showed a median year-end rate projection of 4.1% from the 18 officials excluding Warsh. That was up 0.3 percentage point from June. At his post-FOMC press conference, Warsh said inflation had been too high for too long and that financial conditions were not yet restrictive. He also left the door open to another increase. On Wall Street, more analysts began to factor in an additional move this year, calling the Fed's tightening push stronger than expected.

Markets were surprised by the Fed's hawkish turn, but the response was orderly. The Dow Jones Industrial Average fell 1.2%, while the S&P 500 and Nasdaq posted only modest declines. Yields on 10-year and 30-year Treasuries changed little. South Korea's Kospi slipped 2.56 points, or 0.04%, on September 17. Short-term government bond yields in both South Korea and the US, which are more sensitive to monetary policy, rose sharply.

All FOMC Members Backed Tighter Policy as Strong Growth Fueled Inflation Concerns

Markets See the Decision as More Hawkish Than Expected; Wall Street Bets Tightening Will Extend Into Next Year

"The economy is doing well, but inflation is not coming under control."

That was the essence of Federal Reserve Chair Kevin Warsh's message at his September 16 press conference after the FOMC meeting. With employment, one of the Fed's two mandates, on stable footing, the central bank has room to focus on inflation. Warsh also described the rate increase as an important step toward restoring price stability. That helps explain why investors see a high likelihood of further tightening.

Pushing for a Faster Return to Low Inflation

Before the FOMC meeting, some had expected one or two officials to oppose a rate increase. Instead, all committee members backed the quarter-point move.

The Fed made clear that the main reason for the increase was inflation that had not slowed enough. Warsh used the phrase "a timelier return" to the 2% inflation goal, underscoring his determination to bring price growth down. He said inflation had stayed too high for too long and that financial conditions were not restrictive. Other FOMC members shared that view.

Officials paid particular attention to price indicators that remained in the 3% range, including the personal consumption expenditures index, which rose 3.6% in August. Warsh said inflation readings over the summer had not improved meaningfully. He added that the latest move removed part of the accommodative policy stance and marked an important step. Goldman Sachs and Nomura took those remarks as a decisive signal that another rate increase could follow.

Strong Growth Is Adding to Price Pressures

According to the Summary of Economic Projections released by the Fed, the forecast for US gross domestic product growth this year was raised to 2.3% from 2.2%, while the unemployment-rate outlook was lowered to 4.1% from 4.3%. For next year, GDP growth was revised up to 2.4% from 2.2%, and the unemployment-rate forecast was also cut to 4.1% from 4.3%.

At the same time, the Fed raised its medium-term inflation outlook. It lifted its forecast for core PCE this year to 3.4% from 3.3%, and its 2028 projection to 2.2% from 2.1%. Warsh said strong economic growth and job gains were intensifying upward pressure on prices.

Warsh also struck a constructive tone on the recent rise in the 10-year Treasury yield, which has become a focal point for global markets. He said one reason long-term yields were rising was the strength of the economy. Markets were moving to reflect the future, he said, and he wanted that process to continue.

A stronger economy also helps explain why markets have not been rattled by rate increases the way they were three years ago. In 2022, the Fed delivered aggressive hikes after the post-pandemic recovery was still clouded by uncertainty and June consumer inflation surged to 9.1%. This time, even if the Fed raises rates again, markets do not expect a 2022-style "big step" of 0.5 percentage point.

How Long Will Rate Increases Continue?

Markets took both the FOMC outcome and Warsh's remarks as more hawkish than expected. The relatively sharp declines in financial shares including JPMorgan and Bank of America were seen as reflecting concern that the tightening cycle could continue.

The FOMC has two meetings left this year, on October 27-28 and December 8-9. On Wall Street, another rate increase this year is increasingly being treated as the base case. The dot plot showed a median year-end rate forecast of 4.1% from the 18 officials other than Warsh. Only two projected no change. Morgan Stanley said the Fed had signaled it could move again sooner rather than later. JPMorgan expects one more increase in December.

The possibility of additional rate increases next year is also significant. Once the Fed begins raising rates, the trend has often continued for an extended period. The Wall Street Journal said expectations that this could prove a one-off move had weakened.

Jung-soo Hwang, Korea Economic Daily correspondent in New York / Sang-eun Lee, Korea Economic Daily correspondent in Washington hjs@hankyung.com