The Federal Reserve raised interest rates last week for the first time in three years, a shift that is still working its way through markets this week.
On September 16, the Federal Open Market Committee voted 12 to 0 to raise its target range for the federal funds rate by a quarter of a percentage point, to 3.75 to 4 percent. The Fed also lifted the rate it pays banks on reserves to 3.90 percent. It was the central bank's first hike since 2023, after a period in which the Fed had mostly been cutting or holding rates steady.
The committee's statement described an economy that is still expanding at a solid pace, with strong productivity growth and robust capital investment, and a job market where hiring has kept up with the growing workforce. But it also said inflation remains elevated and that uncertainty is running high, in part because of geopolitical developments, a reference to the effect that this year's conflict between the United States and Iran has had on oil prices and, in turn, on the cost of living. The Fed said the increase was meant to support a timelier return to its longstanding 2 percent inflation goal.
The move mattered beyond the quarter point itself. Updated projections released alongside the decision show that Fed officials now expect to keep rates higher for longer than they thought earlier this year. As recently as February, investors were pricing in a steady decline in rates through 2027. By last week's meeting, those expectations had shifted noticeably higher, with policymakers' own projections showing the funds rate easing only gradually toward roughly 3.25 percent over the long run, rather than falling quickly.
The initial market reaction was rough, with stocks falling sharply the day of the announcement as investors absorbed the idea that cheaper borrowing was further away than hoped. But sentiment has since turned, helped along by easing oil prices, and stocks recovered over the following days.
Investors will be watching this week's economic data, including August new home sales on Thursday and durable goods orders on Friday, for clues about how the economy is holding up under higher rates.
Why did the Fed raise rates instead of cutting them?
Officials said inflation remains elevated, partly because of higher oil prices tied to this year's Iran conflict, and they wanted to speed up the return to their 2 percent inflation target.
Does this mean rates will keep rising?
The Fed's own projections point to only a gradual decline over the coming years, suggesting rates are likely to stay elevated for some time rather than fall quickly.