The US Federal Reserve raised interest rates by a quarter percentage point on Wednesday to a range of 3.75% to 4%, marking its first increase since 2023 as inflation remains above the central bank’s 2% target. The move was approved unanimously, while policymakers signaled that another increase could come before the end of the year.
Of the 18 Federal Open Market Committee officials, 16 projected at least one more quarter-point increase before the end of the year, with their median projection pointing to a rate of around 4.1% by year-end.
US President Donald Trump, meanwhile, called for interest rates to be cut rapidly to 1% or lower, criticizing the Fed’s decision to raise rates.
In a post on his Truth Social platform, Trump said: “We carry almost every country in the world on our shoulders, and this cannot continue. Lower interest rates in the United States, and do it fast!”
The White House had previously criticized the decision, with presidential spokesperson Kush Desai describing the rate increase as “unfortunate” and saying the administration did not believe the move was supported by compelling economic reasons.
Inflation Drives Policy
Federal Reserve Chair Kevin Warsh said the central bank’s primary focus remained price stability, noting that inflation was still elevated and that summer data had not shown meaningful improvement in underlying inflation trends.
Warsh said the Federal Open Market Committee had not yet gained sufficient confidence that underlying inflation was on track to return to 2% within an appropriate timeframe, describing the rate increase as a carefully considered decision.
At the same time, he pointed to an improvement in the US economy since the Fed’s June meeting, with economic activity, spending and investment remaining strong and the labor market close to full employment.
Warsh said it was difficult to characterize financial conditions as restrictive, explaining that the Fed had removed some monetary accommodation to bring financial and credit conditions more closely in line with its objectives.
He also rejected the view that rising US Treasury yields reflected a loss of confidence in the Federal Reserve, attributing higher borrowing costs instead to economic strength, increased capital spending, competition for capital and geopolitical factors.
Inflation and Energy Costs
The rate increase comes amid additional price pressures, including higher energy costs, the continued effects of US tariffs and strong capital spending linked to the artificial intelligence boom.
Fed officials raised their projection for personal consumption expenditures (PCE) inflation to 3.7% in 2026, up from 3.6% in their June forecast. They expect inflation to return to the 2% target in 2029.
The Fed also raised its forecast for US economic growth in 2026 to 2.3%, while projecting an unemployment rate of 4.1% at the end of the year, compared with 4.3% in its June projection.
The median projection from policymakers puts the federal funds rate at approximately 4.1% at the end of 2026, with rates expected to remain relatively high next year.
Warsh offered no forward guidance on upcoming decisions. The Fed has two remaining policy meetings this year, scheduled for late October and early December.
Markets React
Following the decision, the US dollar strengthened, while US stocks declined and Treasury yields rose as investors reassessed the outlook for interest rates.
The S&P 500 fell 0.5% at the close, while the yield on the 10-year US Treasury note moved above 5%. Gold fell by more than 1% as the dollar strengthened and expectations for prolonged higher interest rates increased.
The rate increase is intended to cool demand by raising the cost of borrowing and investment, helping limit the transmission of higher energy costs and other inflationary pressures across the broader economy.
Political Pressure
The decision comes amid continued pressure from the Trump administration to reduce borrowing costs. Trump has repeatedly criticized the Federal Reserve’s policy and called for lower interest rates.
White House economic adviser Kevin Hassett had called on the Fed not to take action before the November midterm elections, while stressing the importance of preserving the central bank’s independence.
Trump also threatened in early September to take trade measures against some countries if the Federal Reserve raised interest rates. Comments from the White House about the presence of “unpatriotic” elements within the Fed’s policy committee had also sparked debate over the institution’s independence.
In response, Warsh stressed that the Federal Reserve must remain “on track” with regard to monetary policy and that its decisions are based on developments in inflation and the economy.
Source: (AFP)
