The US Federal Reserve Board and Bank of Japan have hiked their official policy rates by 25 basis points.
The Federal Open Market Committee (FOMC) have unanimously decided to increase the target range for the federal funds rate by 25 basis points or 0.25% setting the new target range at 3.75% – 4.00%.
This was the first time the new Federal Reserve Chairman Kevin Warsh tightened the monetary policy. Market expectations were also same for the 25 bps hike. Kevin Warsh was under huge pressure from the Trump administration to hold/decrease but this decision from Warsh and FOMC showed the continued focus on decreasing inflation and maintaining fed independence. The Board acknowledged that economic activity is strong and inflation risks are of concern to them. The committee looks firmly determined to support returing the inflation on target to the 2% goal. Fed Chair Kevin Warsh seems to be a hawk who won’t tolerate high inflation and seems to have gained a significant credibility after this decision.
The committee also released the Summary of Economic Projections (SEP). According to the SEP, the median federal funds rate are projected to be around 4.1% at the end of 2026 implying a possible one more rate hike later this year to take the target funds rate to 4.00% to 4.25% level. Inflation is projected to remain above 3% median until 2028 according to the SEP. Comfortably for the fed, unemployment rate is projected to stay around 4.1% median for the next 3 years which gives ample room for the Fed to introduce further tightening if required in the future. The current level of unemployment is regarded as near full employment which balances the dual mandate of the Fed although the FOMC doesn’t explicitly state a certain target for the unemployment rate as they do with the inflation side of the mandate. Changes in real GDP is projected to be constantly around 2.2% median for the next 3 years given the assessment of the Fed that the economic activity is still expanding at a solid pace and resilient domestic spending with possibility of future productivity gains as a result of high capex on AI and several parts of the economy.
On the other hand, the Bank of Japan has increased its uncollateralized overnight call rate i.e. Short-term interest rate to 1.25%. This was decided with a 7-2 majority vote by the Policy Board of the Bank of Japan. This is the highest interest rate level in 31 years. The Policy board noted that the financial conditions have been accommodative in Japan and there has been a high year-on-year rate of increase in the PPI with a continued rise in medium- to long-term inflation expectations.
Sources:
Federal Reserve Board – Federal Reserve issues FOMC statement
Change in the Guideline for Money Market Operations (September 2026 MPM)
