The Federal Reserve raised its benchmark interest rate by a quarter percentage point on Wednesday, putting its target range at 3.75%–4% in its first increase since July 2023.
The Federal Open Market Committee voted unanimously for the move. It marks a sharp change after six rate reductions totalling 175 basis points from July 2023 through early 2026, and follows a rapid shift in market expectations over the past month.
Traders had put the odds of a rate increase above 90%, according to CME Group's FedWatch tool. A month earlier, futures markets had put the probability at only 36%.
The shift came as inflation accelerated during a monthslong surge linked to the Iran war. Consumer prices rose 4.2% year-over-year in May, a three-year high. Prices were 3.4% higher in August than a year earlier, the same annual rate as in the prior month.
Inflation is more than a percentage point above the Federal Reserve's 2% target. Kevin Warsh, the Fed chair, said at a press conference: “The plain fact is that inflation is too high and has been for too long”.
Oil prices have added to the pressure. Crude had returned above $100 a barrel because of the conflict involving Iran. Fighting in the Middle East kept global crude prices above $105 a barrel as of Wednesday. Global oil prices were near a four-month high, while the average price for a gallon of gasoline topped $4.30.
Warsh's remarks at the Federal Reserve's annual Jackson Hole symposium helped speed the market's move towards expecting tighter policy. The detailed reasons officials gave for the reversal in stance, as well as the contents of Wednesday's updated Summary of Economic Projections and rate dot plot extending to 2029, were not specified.
The unanimous decision also contrasted with the committee's July vote, when members voted 9–3 to hold rates steady. The June decision to hold had been unanimous.
The central bank acted against a labour market that continued to add jobs. Employers added 162,000 workers in August, according to a jobs report.
Hours after the announcement, President Donald Trump criticised the decision, calling on the Fed to “LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!” He said “the interest rates are too high, they're not appropriate” and said the Fed had raised them “only for political reasons”. Trump also said he retained confidence in Warsh.
Markets fell modestly after the announcement. The Dow Jones Industrial Average closed down 630 points, or 1.2%, while the S&P 500 dropped 0.4%. The Nasdaq fell 0.01%.
The decision establishes that the Fed sees the current inflation threat as sufficient to halt its previous easing course. It remains unclear whether the rise in prices will prove temporary or persistent, how far any tightening cycle might go, and whether a December rate increase projected by Morgan Stanley will occur.
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