Fed's First Rate Hike Since 2023
On Wednesday, the US central bank's open market committee agreed unanimously to lift its benchmark rate by 0.25 percentage points, bringing it to a target band of 3.75% to 4%. That marks the first such move since July 2023. Officials framed the step as part of their ongoing campaign against stubbornly elevated inflation, which they described as having lasted too long.[S2]
Fed Chair Kevin Warsh described the situation bluntly: inflation remains too high and has done so for an extended period. He added that this summer's price data offer no sign that underlying pressures have substantially eased. While he noted shifting geopolitical conditions, he did not specifically mention the US-Israel conflict with Iran, saying hotspots worldwide cannot be ignored and that assessments of the geopolitical landscape have shifted.[S2]
Trump Pushes Back
Following the decision, President Donald Trump posted on Truth Social that rates ought to be 1% or lower and took aim at the US trade deficit. He argued the country would gain at least 1.5 trillion dollars annually by halting trade with deficit partners, adding that America effectively subsidizes nearly every nation and that this arrangement cannot continue, while pressing for swift rate reductions.[S2]
The increase could put Warsh on a collision course with Trump, who has frequently urged the central bank to lower borrowing costs. Warsh sidestepped questions about how Trump might respond, but repeated that Fed independence works both ways, saying the Fed allows those handling trade and fiscal policy to remain in their own domain, which is how it can judge matters as it sees them. The White House offered no immediate comment.[S1][S2]
Economic Outlook and Inflation
Fresh projections indicated that most officials expected one more increase before the year closes, with four of them forecasting the benchmark rate would land in a 4.25% to 4.5% range by year-end. Even though their outlook for growth and joblessness was optimistic, Fed officials projected it would take until roughly 2029 for inflation to return to the 2% target.[S2]
When the open market committee last met in late July, it kept rates unchanged on a 9-3 vote, the largest share of dissenters on a policy call in a decade. Since then, fresh US-Iran strikes have pushed the Brent crude benchmark to multi-month highs. The conflict has fueled inflation, particularly for energy. Gasoline has averaged about $1 a gallon above year-ago levels, while diesel, used by buses, trains and trucks, recently hit a record $6.31. Inflation worries triggered a bond sell-off, with the 10-year treasury yield reaching a 19-year peak earlier this week despite treasury efforts to steady the market.[S2]
