Projections released by the Fed showed the central bank would hike rates to a median 5.6% by the end of 2023, up from the current range between 5.25% and 5.5%. Twelve Fed officials at the meeting penciled in the additional hike, while seven opposed it. There are two more policy meetings left in the year.
The rate-setting Federal Open Market Committee projected two rate cuts in 2024, which is two fewer than its forecast in June. That would put the funds rate around 5.1%.
The change to fewer projected rate cuts next year has more to do with Fed officials' optimism about economic growth than concerns about stubborn inflation, Fed Chair Jerome Powell said in a press conference.
"Broadly, stronger activity means we have to do more with rates, and that's what that meeting is telling you," Powell said.
The dot plot also moved higher for 2025, with the median outlook at 3.9%, compared to 3.4% previously.
Here are the Fed's latest targets:
Fed members also updated their Summary of Economic Projections, revising their 2023 economic growth expectations up sharply. The Committee now expects gross domestic product to increase 2.1% this year, more than double the 1% estimate from June.
As for inflation, the Fed expects that the core personal consumption expenditures price index would slow to 3.7%, down 0.2 percentage points from June's forecast.
Powell said the Fed is not yet fully convinced that inflation is on the right path.
"We want to see convincing evidence really that we have reached the appropriate level, and we're seeing progress and we welcome that," Powell said. "We need to see more progress before we'll be willing to reach that conclusion."
The projection for the unemployment rate now stands at 3.8% for 2023, compared to 4.1% previously.
— CNBC's Jeff Cox and Jesse Pound contributed reporting.