The Federal Reserve raised interest rates by 25 basis points Wednesday, delivering its first increase since July 2023 as officials confronted persistent inflation.
Key Points:
- The Fed unanimously raised its benchmark range to 3.75% to 4%, its first increase in more than three years.
- Officials lifted their 2026 inflation forecasts and now see the median federal funds rate ending the year at 4.1%.
- The decision reversed the recent direction of policy after rate cuts in 2024 and 2025.
Fed Rate Hike
The Fed voted 12-0 to lift the federal funds target range to 3.75% to 4%, up from 3.5% to 3.75%. The central bank said in its Sept. 16 policy statement that economic activity remains solid, domestic spending is resilient and inflation is still elevated.
“Today's policy action will support a timelier return to the Committee's 2% goal,” officials said. “The Committee will deliver price stability.” The move also marked a shift from the Fed's June projections, when policymakers were more divided over whether further tightening would be necessary this year.
The September rate projections show 12 officials expecting the year-end midpoint at 4.125%, four at 4.375% and two at 3.875%.
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Warsh Rate Outlook
Fed officials raised their median 2026 inflation forecast to 3.7% from 3.6%, while core inflation is now seen at 3.4%, up from 3.3%. They also lifted their GDP growth forecast to 2.3% from 2.2% and lowered the projected unemployment rate to 4.1% from 4.3%.
Fed Chair Kevin Warsh again withheld his own rate projection, leaving 18 dots instead of the usual 19. The projections place the median federal funds rate at 4.1% at the end of 2026, unchanged in 2027, before easing to 3.9% in 2028, while policymakers do not project headline inflation returning to 2% until 2029.
The updated path implies one additional quarter-point increase by year-end if the median projection is realized, though the forecasts are not policy commitments.
The decision came despite repeated pressure from President Donald Trump for lower rates. Trump said Sept. 4 that he could halt trade with countries where the United States runs deficits unless the central bank lowers borrowing costs.
The Fed had last raised rates in July 2023, near the end of its post-pandemic tightening campaign. It later cut rates in 2024 and 2025, bringing the target range to 3.5% to 3.75% before Wednesday's increase reversed direction.
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