By Andrew Ackerman.
The US Federal Reserve has raised interest rates by a quarter of a percentage point and signalled another increase later this year, moves aimed at containing inflation that will test Fed Chair Kevin Warsh’s relationship with US President Donald Trump.
“We removed a dose of accommodation so that financial and credit conditions would be more consistent with our ultimate objectives,” Warsh said at a press conference following the decision.
It was the US central bank’s first rate increase since July 2023.
In his remarks to reporters, Warsh reiterated his concerns about inflation, saying too many categories of goods and services were recording annualised price gains of more than 3% over six- and 12-month periods.
“This summer’s inflation readings do not tell me that underlying trends have meaningfully improved,” he said.
The Federal Open Market Committee voted unanimously on Wednesday to raise the benchmark federal funds rate to a range of 3.75% to 4%.
Yields on short-dated US Treasuries rose alongside the dollar after the Fed decided to lift interest rates and forecast further action to rein in inflation.
Two-year yields, which are the most sensitive to the Fed’s policy rate, erased an earlier decline to trade at 4.71%, more than 10 basis points above their level before the announcement. Longer-term Treasuries lagged the move, with the 10-year yield remaining lower on the day at 4.97%.
Rate projections
In a new set of rate projections released on Wednesday, Fed officials’ median outlook for interest rates at the end of 2026 rose to 4.1% from 3.8%, signalling growing support for a series of rate increases.
Sixteen officials projected at least one additional increase this year, up from six in June who saw at least two total increases in 2026.
The median projection for 2027 pointed to no additional rate increases next year. However, eight policymakers favoured moving another quarter of a percentage point higher by the end of 2027 from current levels.
As in June, when Warsh declined to submit his own forecasts, only 18 of the 19 officials provided rate projections for 2026 and 2027.
The rate increase came after the Bureau of Labour Statistics reported last week that core inflation had risen at a faster-than-expected pace in August. That added to growing concern that inflationary pressures may be broadening beyond the temporary effects of tariffs and the Iran war’s impact on energy prices.
With their decision to raise rates, policymakers also defied Trump, who recently threatened to escalate his trade wars if the Fed doesn’t lower interest rates. On Sunday he repeated his argument that US borrowing costs should be the lowest in the world.
Asked by a reporter what his message to Trump was, Warsh responded: “I’ve got nothing for you on a discussion with the president.”
Warsh warning
Warsh warned last month that inflation was not meaningfully slowing, opening the door to tighter monetary policy. Friday’s inflation report prompted investors to view a rate increase as a near certainty.
In the committee’s post-meeting statement on Wednesday, officials again described inflation as elevated, while also portraying the economy in positive terms.
“Productivity growth is strong, and capital investment is robust,” officials said. “Job gains have kept pace with the workforce, and the unemployment rate has changed little.”
Officials repeated their commitment to price stability. But even with the rate increase, they pushed out by one year their expectation for when inflation would return to 2%. The median forecast now sees it reaching that level in 2029.
Support for higher rates has been building gradually within the Fed throughout the year.
At their July meeting, officials left rates unchanged, but three regional Fed bank presidents – Lorie Logan of Dallas, Beth Hammack of Cleveland and Neel Kashkari of Minneapolis – dissented in favour of a rate increase.
Minutes from that meeting showed that many officials indicated that tighter monetary policy would be necessary if inflation did not decline.
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