The Federal Reserve raised its benchmark interest-rate range by a quarter percentage point Wednesday in its first increase under Chairman Kevin Warsh, moving in the opposite direction of President Donald Trump’s repeated calls for lower borrowing costs.
By yourNEWS Media Newsroom
The Federal Reserve raised interest rates Wednesday for the first time in more than three years, increasing its benchmark range by a quarter percentage point as policymakers responded to inflation that remains above the central bank’s 2% target.
The Federal Open Market Committee increased the federal funds target range from 3.50%-3.75% to 3.75%-4.00%, marking the first policy change since Kevin Warsh became Fed chairman and his first rate increase since succeeding Jerome Powell. The decision was unanimous.
The move was reported by The Hill and followed several meetings in which the Fed held borrowing costs steady under Warsh despite repeated public calls from President Donald Trump for the central bank to reduce rates.
Financial markets had largely anticipated Wednesday’s decision.
Interest-rate futures before the announcement indicated roughly a 90% or greater probability of a quarter-point increase, while 85% of economists surveyed by Reuters over the weekend expected the Fed to raise rates to 3.75%-4.00%. That represented a significant change from an earlier Reuters survey in which about 70% of economists had expected policymakers to leave rates unchanged.
The shift followed new inflation data showing consumer prices rising faster than the Federal Reserve’s target.
The Consumer Price Index increased 0.4% in August and was 3.4% higher than a year earlier, according to the Bureau of Labor Statistics. Gasoline prices rose 3.9% during August and accounted for more than one-third of the monthly increase. Core inflation, excluding food and energy, increased 0.3% for the month and 2.4% over the previous year.
The Fed’s preferred inflation measure has also remained elevated.
The Personal Consumption Expenditures price index was 3.7% higher in July than a year earlier, according to the Bureau of Economic Analysis. Core PCE inflation, which excludes food and energy, was 3.3%. The PCE index had reached 4.1% on a year-over-year basis in May before declining. August PCE figures are scheduled for release Sept. 30.
Warsh had signaled before Wednesday’s meeting that persistent inflation could require additional action.
Speaking at the Federal Reserve’s Jackson Hole symposium in August, Warsh said inflation was still running well above the central bank’s objective.
“The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank. And that is where it belongs,” Warsh said.
In the same speech, Warsh noted that the 12-month PCE inflation rate stood at 3.7% and said price stability remained the more troubling side of the Fed’s dual mandate even as employment conditions remained relatively strong.
Wednesday’s decision puts Warsh at odds with Trump’s public preference for substantially lower interest rates.
Trump renewed his demand days before the meeting while speaking to reporters in Ireland.
“We should be paying the lower interest rate in the world, regardless of [the Fed’s] formulas,” Trump said.
Trump argued that the United States should have lower borrowing costs than other countries regardless of the economic indicators the Fed uses when making policy decisions. Reuters reported Sunday that Trump said the United States “should be paying the lowest interest rate in the world.”
Trump has pressed the Fed to lower rates since Powell was chairman and continued advocating cuts after Warsh took over.
Powell remains a member of the Federal Reserve Board of Governors and participated in Wednesday’s unanimous vote to raise rates.
The relationship between Trump and the central bank became particularly contentious during Powell’s final months as chairman.
Approximately four months before Powell’s chairmanship ended in May, the Justice Department opened a criminal investigation related to the Federal Reserve’s multibillion-dollar renovation of its Washington headquarters buildings.
Powell publicly characterized the investigation as an attempt to pressure the Fed over interest rates.
The Justice Department dropped the investigation in April after federal prosecutors failed to establish evidence of criminal wrongdoing. U.S. Attorney Jeanine Pirro said the matter would instead be examined by the Federal Reserve’s Office of Inspector General and that a criminal investigation could be reopened if evidence warranted it.
The inspector general’s review of the renovation project continued separately.
Powell remained on the Fed board after Warsh became chairman because his term as a governor extends beyond the end of his chairmanship.
Warsh, meanwhile, initially kept rates unchanged after taking control of the central bank, but worsening inflation data and higher energy prices increasingly shifted expectations toward another tightening cycle.
The Iran war has become one of the most significant new factors affecting the inflation outlook.
The United States and Israel began military operations against Iran on Feb. 28, and disruptions affecting energy shipments through the Middle East have contributed to oil prices rising above $100 a barrel.
The Strait of Hormuz, through which a substantial portion of global petroleum supplies normally moves, has experienced reduced shipping activity during the conflict. Threats to tankers elsewhere in the region and disruptions to Russian refining capacity have added further pressure to global energy markets.
Those higher energy costs are feeding directly into gasoline and diesel prices and indirectly into transportation, agriculture, manufacturing and shipping expenses.
The August CPI report showed gasoline prices rising 3.9% in a single month, making energy one of the largest contributors to the latest increase in overall inflation.
The Congressional Budget Office has also warned that the Iran conflict could leave inflation higher than previously projected.
A CBO analysis released Tuesday estimated that the war had cost the federal government approximately $38 billion through Aug. 1 and could add roughly half a percentage point to inflation by early 2027, largely because of energy-market disruptions.
That deterioration has complicated an interest-rate path that had previously been moving downward.
The Federal Reserve began aggressively increasing rates in March 2022 as inflation accelerated following the COVID-19 pandemic.
Consumer inflation reached 9.1% in June 2022, its highest annual rate in approximately four decades.
The Fed raised rates repeatedly through 2022 and 2023, eventually bringing the federal funds target range to 5.25%-5.50% in July 2023.
Policymakers then held that range for more than a year before beginning to reduce rates in September 2024 as inflation declined.
The Fed cut rates by a cumulative percentage point during the final months of 2024, followed by additional reductions that brought the target range to 3.50%-3.75% by December 2025.
Wednesday’s quarter-point increase reverses part of that easing and represents the Fed’s first rate hike since July 2023.
Warsh has emphasized that the central bank’s primary responsibility is returning inflation sustainably to its 2% goal.
At Jackson Hole, he said current readings across both the PCE and CPI measures showed that inflation remained too high.
“Inflation is running above our 2 percent target,” Warsh said in his prepared remarks.
Federal Reserve interest-rate decisions affect borrowing costs throughout the economy, including mortgages, auto loans, business credit and credit cards, although those rates do not necessarily move by the same amount or at the same time as the federal funds rate.
Higher interest rates are intended to restrain demand and reduce inflation by making borrowing more expensive. They can also slow economic activity and raise financing costs for households, companies and the federal government.
Wednesday’s increase therefore comes as policymakers balance inflation concerns against the risk that additional tightening could weaken economic growth.
Recent economic data have shown continued consumer spending even as energy costs rise. U.S. retail sales increased 1.2% in August, according to data released Wednesday, stronger than economists had expected.
The Fed’s decision also comes as household finances face renewed pressure from fuel and borrowing costs.
Oil prices above $100 a barrel have pushed gasoline and diesel prices higher, while elevated Treasury yields have increased mortgage and other long-term borrowing rates.
Before the meeting, the 10-year Treasury yield had approached 5%, its highest levels in years, as investors anticipated tighter monetary policy and persistent inflation.
The Fed’s latest economic projections indicate policymakers expect inflation to remain above their 2% goal for an extended period. Reuters reported that the central bank’s updated forecasts showed rates potentially reaching 4.25% by the end of 2026 and remaining elevated through 2027, while inflation was projected to take longer to return fully to target.
Those projections are not commitments to future rate increases. Fed officials have repeatedly said decisions will depend on incoming economic data, inflation trends, employment conditions and other developments.
Wednesday’s action nevertheless represents a reversal from the rate-cutting cycle that began in 2024.
After reducing borrowing costs as post-pandemic inflation receded, the Federal Reserve under Warsh has now moved back toward tighter policy as the combination of higher energy costs and renewed price pressures keeps inflation above its target.
The increase also establishes a clear difference between the monetary policy preferred publicly by Trump and the decision reached unanimously by the Federal Open Market Committee: while the president has continued calling for lower rates, the Fed raised its benchmark range to 3.75%-4.00%.
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