The US Federal Reserve raised interest rates for the first time since 2023 after the Federal Open Market Committee unanimously voted to increase rates by a quarter of a percentage point, bringing the target range to between 3.75% and 4%, in line with market expectations.
The Federal Reserve said the decision would support a faster return of inflation to its 2% target, noting that uncertainty remained elevated in part because of geopolitical developments.
Energy prices bring inflation back into focus
The decision came after consumer-price data for August showed stalled progress in bringing inflation back to the central bank’s target, amid rising energy costs.
The war with Iran altered the outlook for US monetary policy after a sharp jump in oil prices and the resulting rise in fuel costs. Since the beginning of the year, oil prices have risen by more than 75%, while US gasoline prices have increased by more than 45% since the war with Iran broke out in late February.
These increases helped push the inflation rate to 3.4% in August, exceeding the average US wage growth rate of 3.1%. The rate hike is aimed at preventing the energy-price shock from spreading to other parts of the economy and turning into a broader inflationary wave.
Expectations for continued monetary tightening
New projections from Federal Reserve officials point to the possibility of continued monetary tightening in the coming months, with all but two members of the Federal Open Market Committee expecting to raise interest rates again before the end of the year if inflationary pressures persist.
Before the meeting, investors had priced in a probability of more than 90% that rates would be raised, after consumer-price data for August showed stalled progress in bringing inflation back to the Federal Reserve’s 2% target.
Decision runs counter to Trump’s calls
The decision came less than four months after Kevin Warsh took over as Federal Reserve chair, and ran counter to repeated calls from US President Donald Trump to lower borrowing costs.
Trump said in February that Warsh would not have received his nomination to head the Federal Reserve unless he had been willing to cut interest rates, but rising energy prices have put inflation back at the forefront of US monetary-policy considerations.
