The Fed Hiked Rates. Its New Dot Plot Suggests It Is Not Finished.
The September projections point to another increase this year and no cuts in 2027.
By Eli Breece ·
The Federal Reserve raised its benchmark interest rate by 25 basis points on Wednesday, bringing the target range for the federal funds rate to 3.75% to 4.00%. The decision was a unanimous 12-0 vote. In its policy statement, the Fed said economic activity was expanding at a solid pace and inflation remained elevated.
The more consequential signal for bond investors came from the accompanying dot plot. The median Federal Open Market Committee participant now places the appropriate federal funds rate at roughly 4.1% at the end of 2026 and again at the end of 2027. Since today's target range has a 3.875% midpoint, the year-end projection is consistent with one additional 25-basis-point hike. The unchanged median for 2027 points to an extended hold after that.
This is a huge shift from the Fed's June projections, which placed the median year-end federal funds rate at 3.8% for 2026 and 3.6% for 2027. Today's chart points to a higher policy-rate path in both years, with the larger change in 2027.
So what does the dot plot tell us?
Each dot represents one Fed participant's assessment of the appropriate policy rate at the end of a given year. It is of course not a commitment by that official, a market forecast, or a vote on a particular future meeting. The median is the middle of those individual assessments, and it can move as the outlook changes.
The September chart shows the median rate easing only gradually after 2027, to roughly 3.9% at the end of 2028 and 3.6% at the end of 2029. Individual dots are spread across a much wider range, however. Officials do not all agree on how much tightening will ultimately be necessary or when easing can begin.
The projections describe the policy Fed officials currently consider appropriate under their economic assumptions. If inflation cools faster than they expect, the path could certainly move lower. If price pressures persist, the Fed may need to hold rates higher or tighten further.
Keep in mind that short-term Treasury yields are closely tied to expectations for the Fed's next several decisions. Another projected hike and a long hold make it harder for short-term yields to fall sharply unless we have some form of incoming data that really changes the outlook. Investors rolling Treasury bills may continue to find attractive yields, but a high current bill rate does not lock in that income for the years ahead. Each bill must be reinvested when it matures.
Longer-term Treasuries require a different calculation. The 10-year yield reflects expectations for short-term rates over many years, along with compensation investors demand for inflation uncertainty and the risks of holding longer-maturity bonds. It does not move in lockstep with the federal funds rate. A more persistent Fed tightening path can push long-term yields higher, but a convincing decline in inflation or a weaker growth outlook could pull them lower even while the Fed keeps its current rate unchanged.
The Bond Compass from TreasuryBonds.com reads 63.3 out of 100, placing it in the Medium Duration range based on seven market indicators. With short-term yields still elevated and the 10-year Treasury yielding 4.37% in this snapshot, it favors intermediate-term bonds as a balance between current income and interest-rate risk.
Keep in mind that price sensitivity also rises with duration. As a rough illustration, a bond portfolio with a duration of seven years could lose about 7% in price if its yield rises by one percentage point, or gain about 7% if its yield falls by one percentage point. Those are approximate price effects before coupon income and other changes, not forecasts of total return.
For investors weighing Treasury bills against intermediate or long-term bonds, the choice is therefore about more than which security offers the highest yield today. Bills limit price volatility but expose future income to reinvestment risk. Longer bonds lock in a yield for more time but can move substantially in price as inflation expectations and required yields change.
The next test for this dot plot is the inflation data.
If inflation remains stubborn while growth holds up, the Fed's projected hike and extended hold may prove durable.
If inflation slows decisively or the economy weakens, today's dots could quickly become outdated. Bond investors should watch both the Fed's policy path and the market's response in longer-term yields, rather than treating the new projections as a guarantee of where rates will be in 2027.