The Federal Reserve raised its benchmark interest rates for the first time since 2023 on Wednesday in a move aimed at slowing inflation that picked up again last month.
The Fed’s hike of 0.25% brings the central bank’s flagship rate to between 3.75% and 4.00%.
The Fed’s policymakers unanimously supported the rate hike and signaled one more interest rate hike could come before the end of the year.
The Fed’s decision, which defied President Donald Trump’s wishes for lower interest rates, is a response to elevated inflation readings as the war with Iran drives up prices.
“Uncertainty remains elevated owing, in part, to geopolitical developments. Today’s policy action will support a timelier return to the Committee’s 2 percent goal,” the Federal Reserve’s statement read, referring to its Federal Open Market Committee, or FOMC.
The hike could also be the start of a rate-hiking cycle. Historically, when a central bank raises rates once, it follows it up with additional increases.
“The plain fact is that inflation is too high and has been for too long,” Fed Chair Kevin Warsh said at a news conference in Washington after the announcement.
“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,” he said. “Today, the FOMC decided that this standard has not been satisfied.”
Released alongside the Fed’s rate decision Wednesday were economic projections. As of this week, all but two members of the Federal Open Market Committee forecast another rate increase this year.
Trump has demanded lower interest rates for years. In early February, he told NBC News that Warsh would not have gotten the nomination for Fed chair unless he wanted to lower rates.
Late Wednesday, Trump responded to the rate hike by demanding, “LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!”
Trump said the benchmark funds rate “should be 1% or less,” because the U.S. has “the Best Credit in the World.” However, that is not accurate. Several countries, including Canada, Australia and Germany, are all rated higher by S&P.
“Warsh and the committee are sending a clear message that the Fed will not tolerate inflation drifting further above target, even in the face of political pressure from the White House,” said Brian Rehling, co-head of global fixed income at Wells Fargo.
Asked by a reporter Wednesday what his message for Trump about the rate hike was, Warsh replied, “I’ve got nothing for you on a discussion with the president.”
Kevin Warsh says Fed will ‘stay in its lane’
The war with Iran changed the circumstances after the U.S. and Israel launched it Feb. 28. After less than four months on the job, Warsh is now presiding over a Fed that is increasing rates.
The Iran war has sparked a massive surge in the price of oil this year. That has, in turn, sent gas prices higher by more than 45% since it began.
Those energy prices have helped push inflation up to 3.4% as of August, above average U.S. wage growth of 3.1%.
But Warsh was clear Wednesday about the limits of the Fed’s power to affect direct costs consumers pay.
“We cannot affect any individual price, whether it be oil prices, whether it be foodstuffs at the grocery store,” he told reporters.
“But what we can do, and will do, is ensure that any change in relative prices don’t broaden out, don’t have second- and third-order effects in the economy,” he said.
As Warsh spoke, major stock indexes reversed their earlier gains and turned lower for the trading session.
The S&P 500 closed the day lower by 0.4%, while the Nasdaq Composite ended flat. The Dow fell 630 points, weighed down by sizable drops in shares of IBM, Goldman Sachs, Boeing and American Express.
Following Wednesday’s rate increase, the 30-year Treasury bond yield declined slightly, but it remains at its highest level in years. The yield on the 10-year Treasury bond had fallen earlier in the day, but by 4 p.m. ET it was back up near its highest level since 2007.
Warsh attributed the recent surge in bond yields to three factors.
“First is economic strength,” he said. The second is “the situation in hot spots around the world,” apparently a reference to the Iran war and the war in Ukraine, both of which have restricted global energy supplies. The third factor, he said, is competition for capital from artificial intelligence companies.
