US Federal Reserve Raises Interest Rates For First Time In Three Years As Inflation Remains High

The US Federal Reserve has raised interest rates for the first time since July 2023, increasing its benchmark rate to 3.75%-4% as it battles persistent inflation. The move came despite President Donald Trump’s repeated calls for lower rates, with Fed Chair Kevin Warsh saying inflation remains too high. Higher rates could increase borrowing costs for mortgages, credit cards and loans, while potentially improving returns for savers. Fed policymakers expect at least one more rate increase before the end of 2026, although future decisions will depend on inflation, economic growth and other conditions.

FED RAISES INTEREST RATES TO 3.75%-4%

The US Federal Reserve has raised interest rates for the first time in more than three years, increasing its benchmark rate by a quarter of a percentage point as it seeks to bring persistent inflation under control.
The Federal Open Market Committee voted unanimously on Wednesday, September 16, to raise the federal funds target range from 3.5%-3.75% to 3.75%-4%. The Federal Reserve said inflation remained elevated and that the move was intended to support a faster return towards its 2% inflation target.
The increase was the first US rate hike since July 2023 and marks a significant shift after the central bank had previously been cutting or holding rates.

INFLATION REMAINS ABOVE FED'S TARGET

The Federal Reserve said economic activity was expanding at a solid pace, while consumer spending remained resilient and productivity and business investment were strong.
However, inflation continues to exceed the central bank's 2% target.
The Fed said the latest rate increase was necessary to help bring inflation back towards its target in a more timely manner.
Higher interest rates are one of the main tools central banks use to fight inflation. By making borrowing more expensive, they can discourage spending and investment, which can reduce pressure on prices.
However, the policy can also slow economic activity because businesses and consumers may delay borrowing and spending.

TRUMP WANTED LOWER RATES

The rate increase comes despite repeated pressure from President Donald Trump for the Federal Reserve to lower borrowing costs.
Trump has previously criticised the Fed for keeping interest rates too high and has called for much lower rates.
After Wednesday's decision, Trump continued to argue that US interest rates should be reduced, while also saying he was relying on Fed Chair Kevin Warsh.
Trump has also criticised members of the Federal Reserve's governing board, describing them as hostile and political.
Warsh, who was appointed as Fed chair earlier this year, did not provide a specific forecast for future rate decisions when questioned after the announcement.

WARSH DEFENDS THE DECISION

Warsh said the central bank's decision reflected concerns about persistent inflation.
He stressed that the Fed could not directly control the price of individual goods such as oil or food, but could attempt to prevent temporary price increases from spreading more broadly throughout the economy.
The Fed also pointed to continued strength in the labour market and wider economy as reasons for maintaining its focus on price stability.
The central bank's projections indicate that policymakers expect at least one more rate increase during 2026, although individual officials' forecasts differ.

BORROWING COULD BECOME MORE EXPENSIVE

The increase is expected to affect the cost of borrowing for American households and businesses.
Higher interest rates can push up the cost of credit cards, personal loans, business borrowing and some mortgages.
Major US banks also increased their prime lending rate following the Federal Reserve's decision, potentially raising borrowing costs for customers whose loans are linked to prime rates.
However, Americans with existing fixed-rate mortgages will generally not see their monthly repayments change simply because the Fed raised its benchmark rate.
People seeking new mortgages or refinancing existing loans may face higher borrowing costs.

SAVERS COULD BENEFIT
While higher interest rates can

make borrowing more expensive, they can also provide better returns for savers.
Banks and other financial institutions may increase the interest paid on savings accounts, certificates of deposit and other interest-bearing products as market rates rise.
This creates a trade-off for households: borrowers generally face higher costs, while savers may receive greater returns on their deposits.

OIL PRICES ADD TO INFLATION PRESSURES

The Federal Reserve is also dealing with inflationary pressures linked to higher energy prices.
Oil prices have risen sharply amid the conflict involving the United States, Israel and Iran, increasing costs for transport, manufacturing and other businesses.
Higher fuel costs can eventually feed into the prices consumers pay for goods and services because companies often face higher costs to produce and transport products.
The Fed cannot directly determine the price of oil, but policymakers are concerned about broader inflation becoming persistent.

ECONOMY REMAINS RELATIVELY STRONG

The decision also reflects the Federal Reserve's assessment that the US economy remains resilient.
The central bank said domestic spending had remained strong, productivity growth was robust and capital investment was continuing.
US retail sales also rose strongly in August, providing evidence of continued consumer activity despite elevated prices.
That economic strength gives the Fed more room to focus on inflation rather than immediately cutting rates to support growth.

MORE RATE HIKES COULD FOLLOW

Federal Reserve projections released alongside the decision show that policymakers expect another increase in interest rates before the end of 2026.
The projections also indicate that officials expect inflation to gradually decline over the coming years, eventually moving closer to the Fed's 2% target.
However, the future path of interest rates will depend on inflation, employment, economic growth, energy prices and other developments.
The Fed has therefore avoided committing itself to a fixed sequence of future increases.

FED FACES POLITICAL PRESSURE

The decision has renewed debate over the independence of the Federal Reserve.
Trump has repeatedly called for lower interest rates, arguing that cheaper borrowing would support the US economy.
The Federal Reserve, however, is legally structured to make monetary-policy decisions independently of day-to-day political pressure.
Warsh's support for the rate increase means the new Fed chair has not immediately followed Trump's calls for substantially lower rates.
The disagreement is likely to remain an important issue as the US economy approaches the November midterm elections.

WHAT THE RATE HIKE MEANS FOR AMERICANS

For ordinary Americans, the effects of the decision will vary.
Those taking out new loans, using variable-rate credit cards or seeking a new mortgage could face higher costs. Businesses may also become more cautious about borrowing and investment.
Savers, meanwhile, could benefit from higher returns on some deposits.
The Federal Reserve's broader objective is to slow the pace of price increases without causing an excessive slowdown in economic activity.
With inflation still above target, strong economic activity and energy prices creating additional pressure, policymakers now face the difficult task of deciding how much further interest rates should rise.
The September decision therefore marks a new phase in US monetary policy, with markets and households watching closely to see whether the Fed follows through with another increase later this year.