Fed raises US interest rates for first time since 2023

The US Federal Reserve has raised interest rates for the first time in more than three years as it seeks to bring persistent inflation back towards its 2% target.

At its September meeting, the Federal Open Market Committee (FOMC) voted unanimously to increase the target range for the federal funds rate by 25 basis points to 3.75%-4.00%. The move marks the Fed’s first rate increase since July 2023.

Explaining its decision, the Fed said US economic activity was continuing to expand at a “solid pace”, supported by resilient domestic spending, strong productivity growth and robust capital investment.

Job gains have kept pace with growth in the workforce and unemployment has changed little, but inflation remains elevated.

The FOMC said: “Today’s policy action will support a timelier return to the Committee’s 2 percent goal. The Committee will deliver price stability.”

Federal Reserve Chair Kevin Warsh said inflation had remained too high for too long, with recent readings providing insufficient evidence that underlying pressures had materially eased.

The September decision could also mark the beginning of a renewed tightening cycle. New projections from Fed policymakers indicated support among officials for further increases in borrowing costs, while inflation is now expected to take longer to return sustainably to the central bank’s 2% target.

The prospect of further tightening comes against a backdrop of resilient US economic activity and continued inflationary pressures, including higher energy costs. Financial markets responded to the announcement with higher short-term Treasury yields and a stronger dollar as expectations of further rate rises increased.

George Lagarias, Chief Economist at Forvis Mazars, said the combination of economic resilience and supply-side pressures supported the Fed’s decision.

“A strong economy and increasing supply-side pressures are the perfect recipe for a rate hike. The new and laconic Fed reminded markets that inflation-fighting is its primary mandate.

“The question is not so much whether it will follow through with other hikes. As long as oil prices remain elevated and economic activity robust, it will likely have to. The more interesting question is how the White House, which has been pressuring for cuts, may react to a Fed that is now possibly on a new hiking cycle.”

The rate increase puts the Fed’s current policy direction at odds with President Donald Trump, who has continued to call for substantially lower borrowing costs. Following Wednesday’s announcement, Trump said US interest rates should be 1% or lower and called for rates to be reduced quickly.