Fed hikes interest rates by quarter-point

The Federal Reserve raised interest rates Wednesday for the first time in several years in the face of stubborn inflation.

The central bank’s Federal Open Market Committee (FOMC), under Fed Chair Kevin Warsh, voted unanimously to increase the federal funds rate to a range of 3.75 percent to 4 percent. It marks the first time the Fed has hiked rates in more than three years, and the first time in nearly a year since the range touched 4 percent.

Markets widely expected officials to raise rates by a quarter point in an effort to tame inflation , which remains above the Fed’s 2 percent target amid the war with Iran .

Traders were pricing in a nearly 93 percent chance of the FOMC raising rates by a quarter point Wednesday morning, according to the CME Group’s FedWatch tool , which tracks bets placed on future Fed decisions.

Roughly 85 percent of economists Reuters surveyed over the weekend also predicted a quarter-point hike, a shift from the 70 percent of economists who predicted a hold before the Bureau of Labor Statistics reported annual inflation in August was 3.4 percent, as measured by the consumer price index (CPI).

But the move could rankle Warsh’s relationship with President Trump. The president has long pushed for rate cuts , dating to the tenure of former Fed Chair Jerome Powell — who still sits on the FOMC and voted Wednesday to hike rates.

Roughly four months before Powell’s eight-year tenure ended in May, the Justice Department launched a since-abandoned probe of the then-Fed chair over his handling of renovations to two of the central bank’s office buildings in Washington, D.C.

Powell blasted the probe as an effort by the DOJ, on Trump’s behalf, to pressure the Fed on monetary policy. The former Fed chair has also stayed on as a Fed governor amid Fed Inspector General Michael Horowitz’s investigation into the renovations.

While Trump has given Warsh some room to maneuver in his first few meetings leading the central bank, he appears increasingly impatient for a cut.

“We should be paying the lower interest rate in the world, regardless of [the Fed’s] formulas,” Trump told reporters in Ireland on Sunday.

Warsh had hinted at voting to raise interest rates last month, saying the central bank had “work to do” if inflation was not moving towards its 2 percent target.

“The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank. And that is where it belongs,” the Fed chair said at a summit in Jackson Hole, Wyo.

The Fed has slowly but surely lowered rates over the past few years, as the economy has recovered from a bout of severe inflation.

Inflation surged after the COVID-19 pandemic, rising to a 40-year high of 9.1 percent in June 2022. The central bank began hiking rates in March 2022, although Powell faced criticism from experts for failing to move quickly enough to contain rising prices.

The Fed repeatedly raised rates throughout 2022 and 2023, before settling at a multi-year high of 5.25 percent to 5.5 percent. It kept rates there for more than a year as inflation eased, before starting a series of cuts in late 2024.

Roughly two years after reaching that four-decade high, inflation dipped below 3 percent and hovered between 2.3 percent and 3 percent for about 18 months.

But it spiked after the U.S. and Israel launched the war with Iran, a conflict that has resulted in a shock to the oil industry thanks to the Islamic Republic’s restrictions on shipping in the Strait of Hormuz.

Annual inflation hit a three-year high of 4.2 percent in May and has since fallen to 3.4 percent, according to the CPI.

The Fed’s preferred measure of inflation, the personal consumption expenditures (PCE) price index, also hit 4.1 percent in May and was 3.7 percent in July, according to data from the Bureau of Economic Analysis (BEA). The BEA will release PCE data for August on Sept. 30.

The Iran conflict, which hit the 200-day mark on Wednesday, also threatens to further increase inflation. The nonpartisan Congressional Budget Office reported Tuesday the war will increase its prior projection of annual inflation, as measured by the PCE, in the first quarter of 2027 by 0.5 percentage points.