Fed Delivers First Rate Increase Since 2023, Signals More Tightening Through 2026

MSX Institute's [Daily Observation on U.S. Stocks and RWA] is MSX's flagship market brief. Drawing on in-house macro research, it tracks key forces shaping U.S. equities, global liquidity, and the RWA tokenization market to help investors position in high-quality assets. Today's Observation The Federal Reserve has restarted its hiking cycle. On September 16, the FOMC voted unanimously to raise rates by 25 basis points, lifting the federal funds target range to 3.75%–4.00%. It was the first rate increase since 2023 and the first policy move under Chair Kevin Warsh. The quarter-point hike largely matched expectations. Markets focused on the path ahead. In the latest dot plot, the median projection for the policy rate at end-2026 rose to 4.1% from 3.8% in June, pointing to the possibility of another 25-basis-point move still to come this year. The median projection for end-2027 stayed at 4.1%, implying no cuts next year under the Fed's baseline outlook. Sixteen of 18 policymakers expect at least one additional hike this year. U.S. stocks initially ticked higher, then faded after Warsh stressed inflation remains elevated and the economy is strengthening. The S&P 500 fell 0.44%, the Dow declined 1.21%, and the Nasdaq finished roughly flat. The 2-year Treasury yield climbed to about 4.73%, the 10-year held near 5%, and the dollar rose to its highest level in roughly seven weeks. The Fed framed the decision as a response to upside surprises in both growth and inflation, not a sudden economic deterioration. The 2026 real GDP growth forecast was raised to 2.3% from 2.2%, while the unemployment rate forecast was lowered to 4.1% from 4.3%. Inflation projections moved higher as well: 2026 PCE inflation was lifted to 3.7% from 3.6%, and core PCE to 3.4% from 3.3%. For equities, the setup is mixed. Growth and earnings are still supported, but sticky inflation keeps rates from falling and maintains valuation pressure via higher discount rates. Data per minute - The Fed raised rates by 25 basis points, taking the federal funds target range to 3.75%–4.00%. - The decision passed unanimously, 12–0, marking the first rate hike since 2023. - The median end-2026 policy rate projection increased to 4.1% from 3.8% in June. - 16 of 18 policymakers expect at least one more rate hike within 2026. - The median end-2027 policy rate projection remained 4.1%, leaving no baseline room for cuts next year. - 2026 GDP growth forecast raised to 2.3% from 2.2%. - 2026 unemployment forecast lowered to 4.1% from 4.3%. - 2026 PCE inflation forecast raised to 3.7% from 3.6%. - 2026 core PCE forecast raised to 3.4% from 3.3%. - The S&P 500 fell 0.44%, the Dow dropped 1.21%, and the Nasdaq was essentially flat. - The 2-year Treasury yield rose to about 4.73%, while the 10-year yield stayed around 5%. - The U.S. Dollar Index climbed to a roughly seven-week high as markets priced in the chance of another hike this year. - Warsh said higher long-term yields reflect not only inflation, but also stronger growth, rising capital spending on AI and data centers, and large tech firms competing for financing. MSX View This meeting is best understood through the shift in the Fed's economic assessment, not the size of the 25-basis-point move. Markets had largely assumed inflation would continue to cool and that the Fed, even without cutting soon, would avoid restarting hikes. The new projections challenge that view: policymakers simultaneously upgraded growth, lowered the unemployment outlook, lifted inflation forecasts, and pushed up the projected policy rate. The message is that the economy can tolerate higher rates and that current settings may still be insufficient to return inflation to 2% quickly. Warsh said at the press conference that inflation has been "too high for too long," and that summer data failed to show meaningful improvement in underlying trends. He also pointed to a stronger economy since midyear and a labor market near full employment. In that context, the hike was positioned as an inflation-control decision made from a place of economic strength. For stocks, a growth-backed tightening cycle is easier to digest than emergency hikes during a downturn, but it also limits the case for multiple expansion built on expectations of imminent cuts. The day's tape reflected that tension: the Dow slid more than 1% while the Nasdaq held roughly flat. Higher rates typically pressure long-duration tech valuations, yet megacaps continue to benefit from AI capex, cloud demand, and strong profitability, offsetting some of the drag. That said, AI-linked trades cannot ignore rates. Warsh highlighted that hyperscale cloud providers are raising capital and that surging AI and data center spending is intensifying competition for funding. Once investment reaches sufficient scale, it can lift overall demand for capital and contribute to higher long-term yields. A feedback loop is taking shape: AI investment boosts growth and productivity expectations while increasing demand for power, chips, construction, and financing; stronger growth and larger funding needs push long-term yields higher; higher yields then raise financing costs for data centers and compress fair-value multiples for richly valued tech companies. In that framework, the 10-year Treasury yield may matter more than the funds rate. While the policy rate rose only 25 basis points, the 10-year is already near 5%, close to its highest level since 2007. It flows directly into mortgage rates, corporate borrowing, M&A financing, and equity valuation, making it a central channel of current financial tightening. The Fed's baseline still stops short of a recession call. With 2026 growth projected around 2.26% and unemployment at 4.1%, earnings resilience remains plausible, especially for large technology companies with strong cash flows and low leverage. The greatest pressure is likely on firms dependent on external financing, businesses still unprofitable, or those whose cash flows sit far in the future. Real estate, homebuilding, highly leveraged borrowers, and data center projects requiring continual funding should also be more rate-sensitive. Banks face a more complicated mix of higher short-term rates, yield-curve shifts, and potential credit costs, and should not be treated as automatic winners from hikes. Politics is another layer. Warsh was nominated by Trump, yet the hike runs against Trump's repeated calls for lower rates and still received unanimous FOMC support. That reinforces the Fed's near-term inflation-credibility signal, while raising the possibility of increased friction between the White House and the central bank. What markets now need to monitor is less about whether the Fed mechanically adds one more hike, and more about whether the pillars of this path hold: inflation staying above 3%, a stable labor market, and the 10-year yield hovering around 5%. If inflation fails to improve and the economy remains resilient, another hike this year becomes the base case, with restrictive policy potentially lasting into 2027. If energy prices fall, core inflation cools, or employment weakens unexpectedly, the Fed could still adjust. The key shift is the pricing framework. Investors have moved from debating "when do cuts start?" to reassessing "how long do high rates last, and can AI-driven profit growth outpace financing costs and multiple compression?" Growth continues and AI investment remains active, but cheap capital is no longer the default. Outperformance in the next phase will likely require not just revenue growth, but durable returns on capital in an environment where long-term rates sit near 5%. 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