The Federal Reserve made one of its more consequential moves in years last week, and markets are still absorbing the implications today.
On September 16, the Federal Open Market Committee voted 12-0 to raise its benchmark federal funds rate by a quarter percentage point, bringing the target range to 3.75% to 4%. It was the first rate hike since 2023 and the first change of any kind to the overnight rate so far this year. The Fed had spent the last couple of years either holding rates steady or cutting them as inflation cooled from its post-pandemic peak, so a hike marks a real shift in direction. In its statement, the committee said inflation remains elevated and that the move was meant to support a timelier return to its 2% target. Alongside the rate decision, the Fed raised the interest rate it pays banks on reserve balances to 3.90%, a technical adjustment that helps keep the federal funds rate within its new target range.
The hike came as energy prices and a steady labor market kept inflation pressure higher than the Fed would like. It was widely expected by investors going into the meeting, but what caught markets' attention afterward was the Fed's signal that a second hike could be coming when the committee meets again in October. That signal, combined with a report this week showing U.S. business activity grew in September at its fastest pace in five years, has pushed traders to raise their bets on another increase.
For everyday borrowers, a higher federal funds rate typically means higher costs on credit cards, car loans, and adjustable-rate mortgages, since banks tie many of those rates to the Fed's benchmark. It also tends to make bonds more attractive relative to stocks, which is part of why bond yields and stock prices have been moving in opposite directions this week.
The next Fed meeting is in October. Watch upcoming inflation and jobs data closely, since another strong reading would raise the odds of a second consecutive hike.
Why did the Fed raise rates now?
The Fed said inflation remains elevated, driven in part by higher energy prices, and that raising rates would support a faster return to its 2% inflation target.
How does this affect ordinary borrowers?
Higher Fed rates typically raise costs on credit cards, auto loans, and adjustable-rate mortgages, since many consumer rates are tied to the Fed's benchmark rate.