Fed delivers first rate hike in three years

The Federal Reserve raised interest rates Wednesday for the first time in three years, shifting its focus toward controlling stubborn inflation as the US economy continues to expand.

In a 12–0 vote, the Fed’s Open Market Committee decided to increase its benchmark federal funds rate by a quarter point to 3.75%-4%.

The decision was viewed as a win for Fed independence.

Fed Chairman Kevin Warsh said inflation remains the main problem, while the economy and labor market have strengthened. He also offered an upbeat explanation for rising Treasury yields, citing stronger growth expectations, artificial-intelligence investment and geopolitical risks.

The rate hike was hardly a shock. July inflation remained stubbornly high at 3.7% on the Fed’s preferred measure, with the ongoing Iran war also adding pressure by pushing oil prices higher.

But predictable doesn’t mean unimportant. The rates ripple through the economy, influencing borrowing costs for households and businesses, and decisions ranging from whether to take out a mortgage to how aggressively companies invest in AI.

The hike comes despite President Donald Trump’s repeated calls for rate cuts. The president took to social media to argue rates should be at 1% “or less,” calling on the Fed to lower rates without singling anyone out.

More hikes could come. The central bank’s latest projections show the median official expects the rate to reach 4.1% by the end of 2026, suggesting another quarter-point increase could follow. 

Market reaction
Mortgage rates and Treasury bond yields surged, as markets had already priced in a rate increase.

But stocks fell yesterday after Warsh’s brief remarks, in which he stressed that inflation hadn’t eased, stoked fears of additional rate increases.