Fed raises interest rates for first time in three years as inflation stays high

WASHINGTON - The Federal Reserve raised interest rates on Wednesday for the first time in more than three years after the job market’s August rebound eased concerns about the labor market, while inflation remains above the 2% target and high energy prices add more pressure to the economy.

Key facts

- The Fed raised its benchmark federal funds rate by a quarter percentage point to 3.75%-4%, marking the first increase since July 2023 and a major test for Federal Reserve Chair Kevin Warsh, whose decision went against Trump’s wish for lowered interest rates.

- All 12 members of the Federal Open Market Committee supported the decision.

- Higher oil and gas prices are adding another inflation pressure, making it hard for the Fed to bring prices down without risking slowing the economy.

- The Fed voted 9-3 to keep rates unchanged at July’s meeting, meaning three dissented in favor of a hike even ahead of August’s inflation data, after which market forecasts immediately raised the probability of a hike to 53%, which then rose to 90%.

Key background

The Fed has spent the past few years trying to bring inflation down without causing a hike in unemployment, aggressively raising interest rates in 2022 after inflation surged to its highest level in decades. It raised the rate by 25 basis points to 5.25-5.5% in July 2023, and has not raised it since, holding it level before cutting as inflation cooled, with the benchmark rate eventually falling to 3.5-3.75%.

In August, consumer prices rose 3.4% from a year earlier, while core consumer price index rose 2.4%, keeping price increases above the Fed’s 2% goal. Employers added 162,000 jobs in August and the unemployment rate held at 4.1%, giving the Fed room to focus on inflation instead of rushing to cut interest rates to save jobs, though some economists argue a hike risks putting unnecessary strain on the economy.

Chief critic

President Donald Trump has called for lower interest rates, saying that borrowing costs should come down to 1% or lower. He has warned that if the Fed doesn’t lower interest rates, he’ll cut off trade with countries the U.S. has a deficit with. This posed a major test for Fed Chair Kevin Warsh, Trump’s pick after Jerome Powell completed his second four-year term in May, as the president wants lower interest rates ahead of the midterms. Trump fought with Jerome Powell largely because he didn’t lower interest rates to the extent Trump wanted him to, so Warsh’s decision to raise interest rates could bring about a similar dynamic. (Source: Forbes)