Federal Reserve Raises Interest Rates for First Time Since 2023 as Inflation Remains Elevated
By SCN News
WASHINGTON — The Federal Reserve raised interest rates by a quarter of a percentage point on Wednesday, its first increase since 2023, and signaled that borrowing costs could rise further as policymakers intensify their effort to bring persistent inflation back towards the central bank’s 2% target.
The Federal Open Market Committee voted unanimously, 12-0, to lift the target range for the federal funds rate to 3.75%-4.00%, converting what had been a heavily anticipated move into a significant reversal in the direction of U.S. monetary policy.
The Fed said economic activity was expanding at a “solid pace,” domestic spending remained resilient, productivity growth was strong and capital investment robust. Job gains had kept pace with growth in the workforce and the unemployment rate had changed little, giving policymakers room to focus more aggressively on inflation.
“Inflation remains elevated,” the Fed said in its policy statement, adding that Wednesday’s action was intended to support a more timely return to its 2% inflation objective. The language reinforced the message that policymakers were not treating the increase simply as a technical adjustment after three years without a rate hike.
The decision is the first under Federal Reserve Chair Kevin Warsh and marks a major early test of his leadership. Warsh joined the unanimous vote and said the central bank needed to ensure inflation returned to target in a timely manner, while leaving open the possibility of additional tightening if price pressures failed to ease sufficiently.
New economic projections released alongside the decision strengthened that signal. The median projection among Fed policymakers puts the federal funds rate at 4.1% at the end of 2026, above the midpoint of the new 3.75%-4.00% range. That implies at least one additional quarter-point increase this year if the economy develops broadly in line with officials’ expectations.
The projections also show why the Fed has shifted course. Policymakers now expect headline personal consumption expenditures inflation of 3.7% in 2026, compared with 3.6% in their June projections. Core PCE inflation, which excludes volatile food and energy prices, is projected at 3.4%, also slightly higher than the June estimate.
The central bank does not expect headline inflation to return to its 2% objective until 2029 under the median projections. Inflation is projected to fall to 2.3% in 2027 and 2.1% in 2028 before reaching 2% in 2029, suggesting policymakers see the final stage of restoring price stability as a prolonged process.
At the same time, the Fed does not currently project a sharp economic downturn from tighter policy. Officials raised their median forecast for real GDP growth in 2026 to 2.3% from 2.2% in June, while lowering the projected unemployment rate to 4.1% from 4.3%. The combination of stronger growth, lower unemployment and stubborn inflation gives policymakers greater scope to maintain restrictive monetary conditions.
The rate increase also comes after a sharp repricing in global bond markets. The benchmark 10-year U.S. Treasury yield had climbed to around 5% before Wednesday’s decision, reaching levels not seen since 2007 as investors responded to inflation concerns, higher energy prices and expectations that central banks would have to maintain tighter policy.
Financial markets initially absorbed the decision without severe disruption. Reuters reported that U.S. stocks pulled back after the announcement while the dollar strengthened modestly and Treasury yields were relatively steady, as investors focused less on Wednesday’s widely expected quarter-point increase and more on the prospect of additional hikes.
The policy shift will eventually feed into borrowing costs for American households and businesses. Credit-card rates and some auto and business loans tend to respond relatively quickly to changes in short-term rates, while mortgage rates are influenced more directly by longer-term Treasury yields and expectations for future inflation and monetary policy.
Mortgage rates have already risen as bond yields climbed. AP reported that average U.S. mortgage rates were around 6.76%, meaning housing borrowing costs were increasing even before Wednesday’s Fed decision. Savers, by contrast, could benefit if banks pass higher rates through to savings accounts and certificates of deposit.
The decision also puts the central bank on a different policy path from the one advocated publicly by President Donald Trump, who has called for lower interest rates. The White House has argued that lower borrowing costs would benefit the economy, while the Fed says its decisions are based on its statutory objectives of maximum employment and stable prices.
Warsh was appointed by Trump, but Wednesday’s unanimous decision underscored the institutional independence of the FOMC in setting monetary policy. The disagreement between the administration’s preference for lower rates and the central bank’s decision to tighten policy is likely to keep the Fed under political scrutiny as the United States approaches the November midterm elections.
The Fed also implemented corresponding changes to its operating framework. The interest rate paid on reserve balances will rise to 3.90% effective September 17, while the primary credit rate charged through the Fed’s discount window will increase by a quarter point to 4.00%.
The central bank said it would continue maintaining ample reserves in the banking system and instructed the Federal Reserve Bank of New York’s trading desk to conduct operations necessary to keep the effective federal funds rate inside the new 3.75%-4.00% target range.
Wednesday’s decision therefore represents more than the first U.S. interest-rate increase in three years. The Fed has moved from debating whether inflation requires renewed tightening to actually restarting rate increases, while its latest projections indicate that the shift may not end with a single move.
For markets, households and businesses, the next question is now how far that cycle will go. The Fed’s own median projection points towards another increase before the end of 2026, but officials will receive additional inflation, employment and growth data before making that decision. Warsh and other policymakers have stressed that the path will depend on how the economy evolves rather than an automatic schedule of increases.