US Fed raises interest rates for first time in 3 years, sees more tightening ahead

WASHINGTON – The Federal Reserve raised interest rates on and flagged further increases in borrowing costs in the coming months, with new US central bank chief Kevin Warsh joining a unanimous decision that effectively acknowledges the Trump administration’s inability so far to control inflation that policymakers worry could worsen.

While US President Donald Trump following the start of the US-Israeli war with Iran and capital spending from the artificial intelligence boom has kept price pressures intense enough that the Fed felt it needed to raise its benchmark overnight interest rate by ¼ of a percentage point to the 3.75 per cent to 4 per cent range.

Updated quarterly economic projections showed 16 of 18 policymakers anticipate at least one more quarter-percentage-point hike by the end of 2026, with only two of them seeing rates remaining stable. All but one indicated they saw upside risks to inflation that they no longer described as largely arising from one-off supply shocks.Warsh, who again did not submit rate or other economic projections, attributed the need for tighter monetary policy in part to an economy he sees as picking up speed, with strong economic and job growth adding to price pressures that no longer seem rooted in oil costs or import tariffs alone.“There’s been a pretty wide-ranging set of data, including the labour markets, that the economy has strengthened,” Warsh told reporters in listing the reasons that prompted him to support a rate hike after advocating that rates should remain on hold at the Fed’s July 28-29 meeting.“Domestic spending has been resilient, productivity growth strong and capital investment is robust.”

The rate increase was the first such move in three years and is the first policy shift under the new Fed chief, , repeating what has been a standing call since returning to office in January 2025 that interest rates in the US should be slashed to perhaps 1 per cent, a level usually associated with Fed efforts to boost the economy out of a crisis and something that would likely be inflationary in normal times.

“Interest rates in the United States should be 1%, or less, because we are the best credit in the world – BY FAR. Our country is BOOMING with new investment! If we stopped trading with every country that we have a deficit with, which is most of them, we would make, at least, 1.5 trillion dollars a year. The word ‘deficit’ is nothing more than a fancy word for LOSS... LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!” Trump said on his Truth Social platform in comments that, while not mentioning Warsh by name, were reminiscent of the sorts of barbs the President launched routinely at former Fed chair Jerome Powell.Trump’s reaction highlighted the significance of the Fed’s move under Warsh on .In a truncated press conference, roughly 15 minutes shorter than what was typical under his predecessors, Warsh focused on the emerging evidence that convinced him inflation would not improve at an adequate pace without tighter monetary policy – a direct counter to administration officials’ comments that inflation was no longer a problem or would fall on its own over time.The dollar strengthened broadly and yields on two-year US Treasury notes – highly influenced by Fed policy rate expectations – shot to the highest in more than two years after the release of the Fed’s policy statement and projections.Yields on longer-dated bonds, meanwhile, held steady, flattening the yield curve in an initial vote of confidence that Warsh – who calls inflation a “choice” of the central bank – was at last acting on his running pledge to deliver price stability.“The Fed has finally begun its hiking cycle and the debate now shifts from whether rates will rise again to how many hikes lie ahead,” said Seema Shah, chief global strategist at Principal Asset Management in London.“The unanimous vote shows that rising energy prices and stubborn inflation have brought even the doves on board, making a one-and-done move highly unlikely.”Indeed, rate futures markets reflect about a 90 per cent probability of a follow-up quarter-percentage-point Fed rate hike by the end of 2026, according to CME Group’s FedWatch Tool.The Fed’s policy statement and projections show the policy rate rising to the 4 per cent to 4.25 per cent range by the end of this year and ending 2027 at the same level.Notably, the policy statement dropped a previous reference attributing current elevated inflation to “supply shocks”, particularly in the energy sector, a nod to concerns among policymakers, including Warsh, that price pressures were too broad for comfort.The rate increase was announced less than two months ahead of midterm elections that will determine whether Trump’s Republicans maintain control of Congress for the final two years of his presidency.The Republicans are facing an uphill battle, with voters angry about petrol prices that are about a third higher than a year ago and interest rates on home mortgages that have been rising steadily in 2026. The average rate on a 30-year fixed-rate mortgage is approaching 7 per cent.Fed policymakers marked up their estimates of inflation, as measured by the Personal Consumption Expenditures Price Index, to 3.7 per cent versus the 3.6 per cent projected at a meeting in June.Inflation is not projected to return to the 2 per cent target until 2029, a year later than previously expected.Economic growth was marked up slightly from 2.2 per cent to 2.3 per cent, while the unemployment rate is seen ending the year at 4.1 per cent versus the 4.3 per cent projected in June.

source: The Straits Times https://www.straitstimes.com/business/us-fed-hikes-rates-sees-more-tightening-in-search-of-timelier-drop-in-inflation