The Federal Reserve will likely raise interest rates by additional 50 basis points by the end of the first quarter, analysts said, pointing to what they saw as a hawkish "dot plot."
In a unanimous vote, the central bank's Federal Open Market Committee lifted the policy rate to a range of 3.75% to 4% on Wednesday, marking its first hike in just over three years as it sought to bring inflation down to its 2% target.
The Fed's Summary of Economic Projections document showed the median policy rate at 4.1% by the end of 2026, up from 3.8% projected in June, signaling another hike later this year.
Deutsche Bank expects the Fed to lift interest rates by quarter percentage points in each of December and March, strategist Matthew Luzzetti said in a note emailed toon Thursday.
"This action would unwind the risk management rate cuts the Fed delivered last year," Luzzetti wrote. "Risks to the view are two-sided. If recent data trends continue, we see scope for the Fed to hike again in October. Dovish scenarios include a sharper tightening of financial conditions and/or an unexpected softening in inflation or the labor market."
The Fed's dot plot, which anonymously provides policymakers' interest rate projections, showed that 16 of 18 officials anticipate additional tightening this year. The FOMC is scheduled to hold two more policy meetings this year; next month and then in December.
"The dot plot skewed more hawkish than we anticipated," Luzzetti said.
Fed Chair Kevin Warsh said at the post-meeting press conference that the rate hike removes "a dose of accommodation" from the US economy, suggesting he didn't see financial conditions as restrictive.
"The plain fact is that inflation is too high and has been for too long," Warsh said. "This summer's inflation readings do not tell me that underlying trends have meaningfully improved."
Macquarie Group is also modeling for 50 basis points of additional tightening, penciling in a quarter percentage point hike in each of December and the first quarter of 2027.
That would push the fed funds rate in the 4.25% to 4.5% range, David Doyle, head of economics at Macquarie Group, said in a report on Wednesday. The brokerage previously projected the target range at 4% to 4.25% by the first quarter.
"We saw several developments as hawkish in the communication," including the policy statement dropping supply shocks as a reason for elevated inflation, Doyle said.
Official data showed last week that US consumer inflation and producer prices hit three-month highs in August as energy costs rose.
Markets are currently pricing in a 51% probability that the FOMC will increase interest rates by 25 basis points in October, with the remaining odds in favor of a pause, according to the CME FedWatch tool.
