The Federal Reserve raised its benchmark interest rate on Wednesday for the first time in more than three years, moving the federal funds rate up a quarter point to a target range of 3.75% to 4%.
The Federal Open Market Committee voted unanimously, 12 to 0, in favor of the increase, ending a period in which the Fed had held rates steady since its last hiking campaign concluded in 2023. The move had been widely expected on Wall Street after weeks of comments from Fed Chair Kevin Warsh signaling a tougher stance on inflation, which has been running at an annual rate of about 3.4%, well above the Fed's 2% target. Warsh, who took over as Fed chair earlier this year, said three things had changed since the committee's previous meeting: the labor market has continued to show strength, inflation remained elevated over the summer, and price pressures tied to oil and other commodities have shown signs of spreading more broadly through the economy.
At his press conference, Warsh acknowledged the Fed cannot directly control the price of oil or groceries, but said the central bank's job is to prevent temporary price shocks from broadening into more persistent, economy-wide inflation. He also spoke directly to the impact of inflation on lower-income households, who tend to spend a larger share of their income on necessities like food and fuel. The Fed's updated economic projections, known as the dot plot, showed 16 of 18 officials expect at least one more rate increase this year, with four of those anticipating two more hikes. Only two officials expect the Fed to stop at this single increase. Policymakers also raised their inflation forecasts for the year, now expecting the Fed's preferred inflation gauge to run at 3.7% and the core measure, which excludes food and energy, at 3.4%.
For everyday borrowers, the increase means higher costs are likely on variable-rate debt such as credit cards, home equity lines of credit, and some student and business loans, typically showing up within one or two billing cycles. Fixed-rate loans are unaffected. Savers, meanwhile, may see modestly higher yields on high-yield savings accounts and newly issued certificates of deposit, though banks are often slow to pass along higher rates to depositors.
Markets will be watching upcoming inflation data closely, since most Fed officials have penciled in at least one more rate increase before the end of the year.
Why did the Fed raise rates now?
Officials pointed to persistently high inflation, a strong labor market, and concern that rising oil and commodity prices could spread into broader inflation.
Will the Fed raise rates again this year?
Most Fed officials' projections indicate they expect at least one more quarter-point increase before the end of 2026.