The Federal Reserve raised interest rates this past week for the first time in more than three years, a shift that reflects how much higher energy costs have reshaped the inflation outlook in 2026.
Meeting on Wednesday, the Federal Open Market Committee voted 12 to 0 to raise the federal funds rate by a quarter point, from a range of 3.5 to 3.75 percent to a new target of 3.75 to 4 percent. It was the first increase since July 2023, following five meetings earlier this year in which the Fed left rates unchanged. Fed Chairman Kevin Warsh, who was chosen by President Trump and took over the role in May, told reporters that inflation has been "too high for too long" and that the committee "will deliver price stability." He said the economy has continued to show strength in the labor market, private sector earnings, and capital investment, which gave the committee room to act on inflation.
The committee's statement pointed to inflation that has picked up since early in the year, a trend widely tied to the run-up in oil and fuel prices connected to the conflict affecting the Strait of Hormuz. Updated projections released alongside the decision showed officials expect inflation, as measured by the Fed's preferred gauge, to run at 3.7 percent this year before easing to 2.3 percent in 2027. Of the 18 committee participants who submit projections, 16 penciled in at least one more rate increase before the end of the year, with four expecting two. Warsh does not submit a projection himself.
The decision comes as President Trump has repeatedly called for the Fed to lower borrowing costs, arguing that cheaper credit would help make homes more affordable. Warsh declined to discuss his conversations with the president when asked about the tension, saying only, "I've got nothing for you on the discussion with the president."
The Fed's next scheduled meeting will show whether officials follow through on the additional increase most of them penciled in for later this year.
Why did the Fed raise rates now?
Officials pointed to inflation that has stayed elevated, driven in significant part by higher energy prices tied to the ongoing disruption around the Strait of Hormuz, alongside continued strength in the labor market.
Is another rate hike coming?
A strong majority of Fed officials indicated in their projections that they expect at least one more increase before the end of 2026.