Fed Raises Rates to 4 Percent as Inflation Remains Sticky
The Federal Reserve increased the federal funds rate to a range of 3.75 to 4.0 percent on Wednesday. This marks the first rate hike in more than three years.
The Federal Reserve raised interest rates by 25 basis points on Wednesday. The Federal Open Market Committee voted unanimously to set the federal funds rate target range at 3.75 percent to 4.0 percent. This is the first increase in over three years. The move comes as annual inflation remains above the central bank's 2.0 percent target.
Fed Chair Kevin Warsh did not provide a specific forward projection for the remaining meetings this year. However, the committee's quarterly summary indicates a majority of officials expect further tightening. Twelve of eighteen FOMC members projected one additional hike. Four officials predicted two hikes, while two anticipated no further changes.
Market expectations matched the decision
Traders priced in a high probability of a rate increase before the announcement. The CME Group’s FedWatch tool showed a nearly 93 percent chance of a quarter-point hike. A Reuters survey of economists also predicted the move. Approximately 85 percent of surveyed experts expected the rate rise. This consensus formed after the Bureau of Labor Statistics reported August CPI inflation at 3.4 percent.
Political tension over monetary policy
The decision may strain the relationship between the Fed and the White House. President Donald Trump has consistently called for lower interest rates. He stated that the US should pay the lowest rates in the world. Former Chair Jerome Powell, who remains on the FOMC, voted to hike rates despite ongoing investigations into Fed building renovations. Warsh has emphasized the need to address sustained high inflation levels.
Inflation drivers include geopolitical conflict
Inflation had hovered between 2.3 and 3.0 percent for 18 months. Recent spikes align with the conflict involving Iran. Restrictions on shipping in the Strait of Hormuz have shocked the oil industry. This geopolitical factor has contributed to the rise in prices. The Fed had cut rates in late 2024 as inflation eased from its 2022 peak of 9.1 percent.
