Fed Raises Rates to 3.75% to 4.00% Range
The Federal Reserve increased its benchmark rate by 25 basis points, marking the first hike since 2023. New projections indicate further tightening is expected before year-end.
The US Federal Reserve raised its benchmark overnight interest rate by 25 basis points to the 3.75%-4.00% range on Wednesday. This marks the first increase in rates since 2023. The decision was unanimous, including new chair Kevin Warsh. The move acknowledges persistent inflation pressures despite the administration’s goal of lower prices.
The hike stems from combined impacts of global import tariffs, energy shocks, and capital spending. Inflation remains elevated enough to prompt additional action. The central bank aims to support a timely return to its 2% inflation goal. This policy shift reverses the expectation of rate cuts that accompanied Warsh's appointment.
Policymakers expect further hikes
Sixteen of 18 policymakers anticipate at least one more quarter-point hike by year-end. Only two officials see rates remaining stable. New projections show the policy rate rising to 4.00%-4.25% by the end of this year. The rate is projected to end 2027 at the same level. Warsh did not submit a specific rate projection.
The policy statement dropped previous references to supply shocks. It indicates that price pressures are too broad to be comfortable. This opens the door to tighter monetary policy through next year. The statement withholds forward guidance on upcoming decisions, consistent with Warsh’s preference.
Dollar rises against euro
The US dollar rose against the euro following the announcement. US Treasury bond yields held largely steady. The 10-year Treasury yield traded at 4.958% after hitting a 19-year high. The 30-year bond yield dipped to 5.312%. Stocks were mostly higher, with the S&P 500 up 0.3%.
Market bets on a rate hike at the next meeting in late October increased. The probability rose to 56.5% from 54% before the hike. This data comes from CME Group’s FedWatch Tool. The Nasdaq Composite index was up 0.7%. The market reaction reflects a shift toward tighter monetary policy expectations.
Inflation pressures remain intense
Gasoline prices are about a third higher than a year ago. Average rates on 30-year fixed-rate mortgages are approaching 7%. These factors create an uphill battle for Republicans in upcoming midterm elections. Inflation estimates in the quarterly projections were raised. The Personal Consumption Expenditures measure shows continued pressure.
Michele Raneri of TransUnion noted the Fed’s focus on persistent inflation. She stated that inflation has moderated from peak levels but remains elevated. The decision reflects a continued focus on addressing these pressures. Warsh is scheduled to hold a press conference to elaborate on the decision. The source for this report is GN markets/policy (en-US).
