Federal Reserve raises rates as U.S. inflation pressures persist

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Fed raises rates amid inflation

Highlights

Federal Reserve raises the federal funds rate target range by 25 basis points, with projections signaling an additional 25 basis point hike in 2026.
U.S. headline PCE inflation remains elevated at 3.7% in July and CPI climbs 0.40% month over month in August, driven mainly by a 3.9% gasoline price surge.
10-year and 30-year Treasury yields rise above 5.0% and 5.4% respectively, reaching multi-decade highs amid persistent inflation and fiscal concerns.

Policy decision and inflation outlook

As reported by HR Ratings, the Federal Reserve raises its target range for the federal funds rate by 25 basis points, a move that market participants widely expect and that the Federal Open Market Committee approves unanimously. The accompanying statement stresses the Fed's commitment to price stability, while the updated Summary of Economic Projections shows a median expectation of an additional 25 basis point increase in 2026.

The projections also revise the unemployment rate estimate downward and lift both growth and PCE inflation forecasts. Chairman Warsh says inflation has been unduly high for an extended period and indicates the central bank is prepared to act as conditions require.

HR Ratings expects one more 25 basis point increase before the end of the year, arguing that real rates remain too low relative to inflation. It says headline PCE inflation at 3.7% in July leaves the real rate near zero, reinforcing the case for another hike in December, if not earlier.

Yield curve pressure and broader economic effects

Recent inflation data continue to show added price pressure across the U.S. economy. In August, the Consumer Price Index rises 0.40% month over month after a 0.07% increase in July, while core CPI posts its largest monthly gain in four months at 0.29% and energy prices rebound 2.10%.

Within core categories, services excluding energy services rise 0.3% month over month, led by shelter and transportation, while goods excluding food and energy remain comparatively stable. Gasoline jumps 3.9% on the month and accounts for more than one third of the headline increase, with the national average regular gasoline price reaching $4.06 per gallon in August, according to Bureau of Labor Statistics data.

HR Ratings says inflation still faces upward pressure from elevated energy costs tied to the prolonged closure of the Strait of Hormuz and keeps its year-end 2026 headline CPI forecast at 3.8% year over year. It adds that a more hawkish Fed outlook, higher-for-longer inflation expectations and fiscal concerns are pushing Treasury yields higher, with the 10-year yield moving above 5.0% and the 30-year yield above 5.4%, both at multi-decade highs last seen in 2007.

In our earlier coverage of St. Louis Fed President Alberto Musalem’s comments on persistent inflation, we noted that fresh price pressures and resilient demand were keeping the Fed oriented toward additional rate hikes after a quarter-point increase. The piece highlighted Musalem’s view that inflation was becoming embedded beyond oil-related shocks, with higher commodity costs and strong spending complicating the path back to the 2% target, and it outlined market and Fed projections pointing to at least one more increase ahead.

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