The Federal Reserve raised interest rates for the first time in three years on Wednesday and sees raising rates one more time this year to arrest sticky inflation as renewed tensions in the Middle East drive oil prices higher and raise concerns about broadening price pressures.
The central bank voted in a unanimous decision to raise its benchmark interest rate to the range of 3.75% to 4% from 3.5% to 3.75%, marking the first rate hike since July 2023.
“Today’s policy action will support a timlier return to the Committee’s 2% goal,” officials said in their policy statement, “The committee will deliver price stability.
Officials see one more rate hike this year. That compares with expectations in June when half expected they would need to raise rates once this year, while the rest thought they could hold rates steady. Fed Chairman Kevin Warsh didn’t show his hand, declining to participate for the second time. Warsh has designated a task force to look into making changes to the Fed’s so-called dot plot, the compilation of interest rate projections by each member of the committee.
This year, 12 officials see two rate hikes, four see three rate hikes, while two see one rate hike.
The median of 18 Fed officials see holding rates steady next year after two hikes this year and then one cut in 2028.
Inflation is now seen rising 3.7%, compared with 3.6% previously on a headline basis. On a “core” basis, officials see inflation at 3.4%, compared with 3.3% previously. Officials don’t see inflation dropping back to their 2% goal until post 2028.
The latest Consumer Price Index reading showed prices rose 0.3% in August month over month on a “core” basis, which strips out volatile food and energy prices to better gauge underlying inflation. That was an acceleration over the prior two months, and a hair faster than the 0.2% threshold many officials need to see to be convinced inflation is slowing on its own.
The Fed expects a slightly stronger economy with GDP growing 2.3% versus 2.2% previously. The unemployment rate is seen ticking down to 4.1% versus 4.3% previously. The unemployment rate currently stands at 4.1%.
Officials noted in their statement that uncertainty remains elevated in part due to geopolitical developments, but that domestic spending has been resilient.
The Fed’s actions come nearly seven weeks before the midterm elections, at a time when President Trump has urged the central bank to cut rates, warning he might otherwise halt trade with countries maintaining trade surpluses with the US. Treasury Secretary Scott Bessent has similarly argued that recent inflation reflects a temporary supply shock from higher oil prices and tariffs that are washing through. Bessent maintains that the Fed should look through these passing factors rather than raising rates, as inflation will eventually decline on its own.
