The US Federal Reserve voted to raise interest rates on Wednesday for the first time since 2023 as the central bank continues to fight to tamp down inflation. The Fed’s open market committee voted unanimously to raise its benchmark interest rate by a quarter-percentage point to a range of 3.75% to 4%. This is the first time the Fed has raised rates since July 2023 and potentially sets Kevin Warsh, the current Fed chair, on a collision course with Donald Trump.
Today’s policy action will support a timelier return to the Committee’s 2 percent goal,” the committee said in a statement. The move comes after Trump explicitly said the US should have the “LOWEST RATE of any country in the World” and that he would “stop trading with countries with which we have a deficit” if the central bank doesn’t lower rates. Trump nominated Warsh under the expectation that he would cut rates, though Warsh has said he maintains independence from the White House.
New projections showed a majority of officials penciled in another rate hike before the year’s end, with four officials predicting the Fed’s benchmark interest rate will reach a range of 4.25% to 4.5% by the end of the year. And though estimates on the country’s economic growth and unemployment rate were upbeat, Fed officials believed it would take roughly until 2029 for inflation to reach its 2% goal. The ongoing US-Israel war with Iran, has driven up inflation, especially energy prices.
Gas prices have remained, on average, $1 a gallon more expensive compared with a year ago. Diesel fuel, which is used for buses, trains and trucks, recently reached an all-time high of $6.31. Concerns about inflation have induced a sell-off in the US bond market, with the yield on the 10-year treasury note hitting a 19-year high earlier this week, despite efforts from the US treasury to calm the market.
Typically seen as one of the safest investment vehicles, trouble in the US bond market can lead to higher interest rates for consumer and business loans. The Fed uses interest rates as a tool to cool price increases by slowing activity. Higher interest rates impact mortgages, car payments, student debt and other types of loans.
After inflation reached a generational high of 9.1% in June 2022, the Fed increased rates 11 times from 2022 and 2023. Rates were brought up to a target range of 5.25% to 5.5% before the Fed eventually started lowering rates in 2024 and 2025. At the beginning of the year, when the annualized inflation rate was 1% lower than current levels, a Fed rate hike seemed highly unlikely.
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