The US Federal Reserve voted to raise interest rates on Wednesday for the first time since 2023 as the central bank continues to struggle to curb inflation.
The Fed’s Open Market Committee voted unanimously to raise its benchmark interest rate by a quarter percentage point to a range of 3.75% to 4%. This is the first time the Fed has raised rates since July 2023 and potentially puts Kevin Warsh, the current Fed chairman, on a collision course with Donald Trump.
“Inflation remains high. Today’s policy actions will facilitate a more timely return to the committee’s 2 percent target,” the committee said in a statement.
The move comes after Trump explicitly stated that the US should have the “LOWEST RATE of any country in the world” and that he would “stop trading with countries we have a deficit with” unless the central bank cuts rates. Trump nominated Warsh expecting him to lower the stakes, although Warsh has said he remains independent from the White House.
The new forecasts showed a majority of officials targeting another rate hike before the end of the year, with four officials predicting the Fed’s benchmark interest rate will reach a range of 4.25% to 4.5% by year’s end.
And while estimates of the country’s economic growth and unemployment rate were optimistic, Fed officials believed that inflation would not reach its 2% target until about 2029.
The ongoing US and Israeli war with Iran has led to rising inflation, especially in energy prices. Gas prices remained an average of $1 per gallon higher than a year ago. Diesel fuel, which powers buses, trains and trucks, recently hit a record high of $6.31.
Inflation concerns have sparked a sell-off in the US bond market, with the 10-year Treasury yield hitting a 19-year high earlier this week despite efforts by the US Treasury to calm the market. Trouble in the U.S. bond market, generally seen as one of the safest investment vehicles, could push up interest rates on consumer and business loans.
The Fed uses interest rates as a tool to curb price increases by slowing economic activity. Higher interest rates affect mortgages, car payments, student debt and other types of loans. After inflation peaked at 9.1% in June 2022, the Fed raised rates 11 times from 2022 to 2023. Rates were brought to a target range of 5.25% to 5.5% before the Fed eventually began cutting rates in 2024 and 2025.
At the start of the year, with annual inflation running 1% below current levels, a Fed rate hike seemed unlikely. Most Fed officials actually predicted rate cuts before the end of the year. But inflation remained stubbornly high in August while unemployment remained stable, increasing the chances of a rate hike.
Rising prices have painted a grim economic outlook as voters prepare to head to the polls in November. Recent data and surveys have shown that higher inflation has wiped out American wage growth and worsened the outlook for consumers. In August, hourly employee pay fell 0.1% year-over-year when adjusted for inflation and fell 0.3% from the previous month. Consumer sentiment also fell quickly, according to a monthly University of Michigan survey, while expectations for rising inflation rose.
Candidates on both sides of the political aisle have sought to make cost-of-living and economic issues at the forefront of their campaigns, but voters are divided over which party has the biggest advantage on the issue, according to recent data from the Pew Research Center.
Trump, meanwhile, implored Republican voters to pretend to vote for him in their midterm elections and promised every American a $5,000 “Trump dividend” if Republicans retain control of Congress. Critics called the move bribery and warned of financial consequences, especially after the US national debt hit a record high of $40 trillion last month.