Fed raises rates a quarter point to 3.75%–4% range

The Federal Reserve raised its benchmark interest rate by a quarter point to a range of 3.75 percent to 4 percent on Wednesday, the first hike in more than three years. Fed Chair Kevin Warsh said the move would “support a timelier return” to the central bank’s 2 percent inflation target.

The vote by the Federal Open Market Committee was unanimous. It is the first rate hike since the range touched 4 percent nearly a year ago.

Warsh, speaking to reporters after the decision, described current financial conditions as anything but tight.

“I would be hard pressed to describe broad financial conditions as restrictive,” he said. “This view was widely shared by the committee, so we removed a dose of accommodation.”

Twelve of 18 FOMC officials projected a single additional rate hike for the year’s remaining two meetings, according to the quarterly summary of economic projections released Wednesday. Four projected two hikes, and two predicted a pair of holds. Warsh abstained from offering a projection, as he did in June.

Markets had largely expected a quarter-point increase. Traders priced in a nearly 93 percent chance of the move Wednesday morning, according to the CME Group’s FedWatch tool. A Reuters survey of economists taken over the weekend found roughly 85 percent predicted a quarter-point hike, up from 70 percent before the Bureau of Labor Statistics reported annual inflation in August at 3.4 percent, as measured by the consumer price index.

The decision comes against a backdrop of tension with President Trump, who has long pushed for rate cuts. Former Fed Chair Jerome Powell, who still sits on the FOMC, voted Wednesday to raise rates.

“We should be paying the lower interest rate in the world, regardless of [the Fed’s] formulas,” Trump told reporters in Ireland on Sunday.

The Justice Department launched a since-abandoned probe of Powell roughly four months before his eight-year tenure ended in May, examining his handling of renovations to two Fed office buildings in Washington, D.C. Powell criticized the probe as an effort to pressure the Fed on monetary policy. He remains on the Fed board amid Fed Inspector General Michael Horowitz’s investigation into the renovations.

When asked about Trump on Wednesday, Warsh chuckled in response to one of two questions and declined to answer the other.

Speaking more broadly about Fed independence, Warsh called it “a two-way street.”

“We let people that do trade policy and fiscal policy stay in their lane too,” he said. “That’s how we can stand up here and call them the way we see them.”

At a summit in Jackson Hole, Wyo., last month, he blamed the central bank for sustained price increases.

“The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank,” Warsh said. “And that is where it belongs.”

Inflation surged to a 40-year high of 9.1 percent in June 2022 after the COVID-19 pandemic, and the Fed began raising rates in March 2022. It repeatedly hiked through 2022 and 2023 before settling at a multiyear high of 5.25 percent to 5.5 percent, where it held for more than a year as inflation eased. The Fed began a series of cuts in late 2024.

Inflation dipped below 3 percent about two years after its 40-year peak and hovered between 2.3 percent and 3 percent for roughly 18 months before spiking after the U.S. and Israel launched the war with Iran. The conflict, which hit the 200-day mark on Wednesday, has disrupted oil markets through Iran’s restrictions on shipping in the Strait of Hormuz.

Annual inflation hit a three-year high of 4.2 percent in May and has since fallen to 3.4 percent, according to the CPI. The Fed’s preferred measure, the personal consumption expenditures price index, hit 4.1 percent in May and stood at 3.7 percent in July, according to the Bureau of Economic Analysis. PCE data for August is scheduled for release Sept. 30.

The nonpartisan Congressional Budget Office reported Tuesday that the war will increase its prior projection of annual inflation, as measured by the PCE, in the first quarter of 2027 by 0.5 percentage points.

FOMC officials slightly raised their inflation outlook in the quarterly summary. The median projected inflation rate for this year was 3.7 percent, up from 3.6 percent in June. Officials do not project inflation reaching 2 percent until 2029, three months later than previously projected.

Warsh said the committee is committed to delivering “price stability,” and pointed to lower-income Americans as the biggest beneficiaries.

“The least well off are the ones who have the most to gain from stable prices,” Warsh said, specifically naming those who do not own a home, have a 401(k) plan and are living paycheck-to-paycheck.

“In stable prices, an environment where inflation is running consistent with our 2 percent objective offers good news because that way, when they get their wages, they can put their head above water and deliver real take-home pay increases,” Warsh said.