September 16, 2026 FOMC Meeting Analysis

Good afternoon, and welcome to our FOMC Meeting Analysis.

I am Andrew Paolillo, Director of Member Lending and Strategies at the Federal Home Loan Bank of Boston.

As widely expected, the Federal Open Market Committee voted to raise the federal funds target range by 25 basis points, bringing the target range to 3.75 to 4.00 percent.

This is the first rate increase since July 2023, and importantly, today’s decision was unanimous-in contrast to July, where three members voted to hike while nine voted to hold firm.

The biggest takeaway from today’s meeting is that the Fed has moved from a divided pause in July to a clear focus on preventing elevated inflation from becoming more persistent.

Chairman Kevin Warsh noted that they would be hard pressed to call business conditions restrictive, so they chose to remove a dose of accommodation.

He noted inflation has remained above the 2% target for over five years, and it was not making the progress they wanted to see.

The Committee continues to characterize economic activity as expanding at a solid pace, with resilient consumer spending and robust business investment.
One phrase that stood out was that the Fed said today’s policy action will support a “timelier return” to its two percent inflation goal. However, in the Summary of Economic Projections, inflation is not projected to hit 2% until 2029, with PCE and core PCE still projected above 3% this year.

That is a meaningful shift from the wait-and-see posture we discussed in July.
The median projection now has the federal funds rate at approximately 4.1% at year-end, implying another 25-basis-point increase before the end of the year.

At the same time, the Fed remains relatively constructive on economic growth, with the 2026 GDP forecast around 2.3% and unemployment around 4.1%.

The Chairman was constructive on the strength of the labor markets and pointed out that they don’t have to harm labor markets to meet inflation objectives.

So the message is the economy is not weakening materially. But inflation is proving more persistent than the Fed wants, while economic activity remains strong enough to give policymakers room to keep policy restrictive.
As he has throughout his first several meetings, the Chairman avoided providing explicit forward guidance, preferring that markets react to the data rather than simply react to what they think the Fed is going to do.

That philosophy has become particularly important as longer-term rates have already moved significantly higher.

Warsh attributed the move in bond yield to a combination of strength in the economy, competition for capital, and geopolitical uncertainty.
The 10-year Treasury yield recently moved above five percent, meaning financial conditions have tightened even before today’s 25-basis-point move in the overnight rate.

For depository institutions, higher short-term rates mean continued pressure on deposit pricing and retention, particularly for rate-sensitive commercial and consumer deposits.

At the same time, the higher level of market rates, and the positive slope in the yield curve, create more attractive economics for putting cash to work, whether through loan growth or the investment portfolio.

Loan demand and asset quality will be important to watch here.
A resilient economy supports credit demand and loan performance, but the longer rates remain elevated, the more important borrower cash flow, refinancing needs and credit migration become.

So, what does today’s meeting mean for FHLBank Boston members?

The key change from July is that the Fed is no longer simply waiting for inflation to improve.

It has now acted, and the projections suggest that another hike remains firmly on the table.

But Chair Warsh continues to emphasize data dependence rather than a predetermined rate path. And between the two components of the dual mandate, it is clear that tackling inflation is the primary objective.

The combination of elevated short-term rates, a five-percent-plus ten-year Treasury environment,
and continued uncertainty around inflation creates both funding challenges and asset-allocation opportunities.

We will continue to monitor economic and market data and the implications for funding costs, loan demand, asset quality and balance-sheet strategy for our members.

Thank you for watching.