The US Federal Reserve raised its benchmark interest rate by 25 basis points to a target range of 3.75%-4.00% on Wednesday, its first rate increase since 2023, and signalled that another hike could follow before the end of the year.
The Fed’s latest projections put the median federal funds rate at 4.1% at the end of 2026, compared with the current 3.75%-4.00% range. The projections show that 16 of the 18 officials expect at least one additional rate increase this year, while four see two further hikes.
The central bank also raised its inflation outlook, with the median projection for headline personal consumption expenditures (PCE) inflation reaching 3.7% in 2026, up from 3.6% in its June projections. It sees inflation easing to 2.3% in 2027 and reaching its 2% target in 2029.
Commenting on the latest FOMC decision, Lale Akoner, Global Market Strategist at eToro, said the Fed was signalling to markets that the latest increase was unlikely to be the last.
“If inflation stays sticky, there is still room for rates to go higher,” Akoner said.
Akoner noted that the Fed’s longer-run rate projection has risen to around 3.2%, suggesting that interest rates could settle above the exceptionally low levels seen in the years before the recent inflation shock.
She said strong consumer demand and substantial investment in artificial intelligence may have helped the economy absorb higher borrowing costs, while consumers are likely to face increased costs for credit cards and auto loans.
Higher borrowing costs could eventually weigh on consumer spending and hiring, Akoner said, while cash and short-term bonds could become more competitive for investors.
She added that the higher-rate environment could create a tougher backdrop for stocks and cryptocurrencies, particularly highly valued growth companies whose valuations rely heavily on earnings expected further in the future.
“AI companies can still benefit from strong investment, but at these valuations, there is less room for things to go wrong,” Akoner said.
Investors should expect greater market sensitivity to inflation, employment and consumer spending data, she added, with strong balance sheets and reliable profits becoming increasingly important.
