Fed Raises Rates For First Time In Over 3 Years

The Federal Reserve raised interest rates Wednesday for the first time in more than three years as renewed inflation pressure forced policymakers to tighten borrowing conditions despite President Donald Trump’s calls for lower rates.

The Federal Open Market Committee (FOMC) increased its benchmark federal funds rate by a quarter percentage point to a range of 3.75% to 4%, reversing part of the rate-cutting cycle that ended in 2025. The move came after hotter inflation readings, an oil-price surge tied to the Iran war and a sharp selloff in long-term Treasury debt.

The decision marked the first rate increase since July 2023 and the first change in policy under Fed Chairman Kevin Warsh, who took office in May.

Financial markets had largely anticipated the increase. Traders priced in a roughly 93% chance of a quarter-point hike before the announcement, while economists surveyed by Reuters overwhelmingly expected the Fed to raise rates, according to Reuters.

The Fed held its target range at 3.5% to 3.75% at its July meeting. Three policymakers dissented from the central bank’s decision to leave rates unchanged, arguing then for the same quarter-point increase the committee delivered Wednesday.

Inflation remained well above the Fed’s 2% target heading into the meeting. Consumer prices rose 0.4% in August, while gasoline prices climbed during the month, according to the Bureau of Labor Statistics.

The Iran war disrupted energy supplies and shipping in the Middle East, raising oil prices and contributing to higher energy and food costs. Fed officials warned in July that a prolonged conflict could extend supply-chain disruptions and keep upward pressure on inflation, including by affecting consumers’ and businesses’ expectations of future price increases.

It is unclear at this point if the Fed’s monetary policy actions will blunt the effects caused by war-driven supply shocks.

The Fed’s July monetary policy report said headline personal consumption expenditures inflation reached 4.1% in May and core inflation reached 3.4%, with the central bank pointing to energy supply disruptions and other shocks. Policymakers nevertheless described economic activity as expanding at a solid pace and the labor market as stable in their previous statement.

The rate increase also came amid turmoil in the Treasury market, where long-term yields surged as investors confronted persistent inflation and concerns about government borrowing. Treasury Secretary Scott Bessent moved to support the market by increasing the size of long-dated Treasury buybacks from a maximum of $2 billion to at least $4 billion per operation beginning Sept. 9.

The intervention did not halt the selloff. Treasury later conducted a $6 billion long-dated buyback, but yields continued rising, with the benchmark 10-year Treasury yield climbing above 5% and reaching levels not seen since 2007, according to Reuters.

The hike could raise borrowing costs for credit cards, home-equity lines and other variable-rate debt while increasing returns on some savings products. Longer-term rates, including mortgages and Treasury yields, also respond to inflation expectations and investors’ view of the Fed’s future path rather than moving mechanically with one policy decision.

Trump selected Warsh while publicly pressing the central bank to reduce borrowing costs. A sustained series of hikes could widen the distance between the White House’s preferred policy and the Fed’s effort to contain prices.