US interest rates have been raised for the first time in more than three years and could be increased further in a bid to slow rising prices. Rates were hiked to 3.75%-4% from 3.5%-3.75% by the Federal Reserve in a unanimous decision on Wednesday despite fierce opposition from President Donald Trump, who had called for rates to be cut. Fed Chair Kevin Warsh said the move was because "inflation is too high and has been for too long", adding that it was a "sober" and "responsible decision".
However, Trump said rates "should be 1%, or less, because we are the Best Credit in the World - BY FAR". Higher interest rates make borrowing more expensive for people wanting to secure loans, mortgages and credit cards, but can lead to better returns on savings. Warsh said while there was "an attitude of optimism" within the Federal Reserve leadership, inflation remained a problem.
"For more than five years, inflation has been running above target," he said. "The plain fact is that inflation is too high and has been for too long." Central banks tend to increase rates when inflation is high to discourage spending and encourage saving in the hope this will reduce the pace of price rises. But it's a balancing act, as higher rates can also encourage businesses to hold off on investing and hurt economic growth.
Ahead of the mid-term elections in November, affordability is one of the top concerns of American voters, who have seen diesel prices hit an all-time high and petrol rise above $4 (£2.99) a gallon on average. Global oil prices have surged since the start of the US-Israel war with Iran, driving up the price of car fuel as well as the cost of goods and services generally. Warsh told a press conference following the decision to raise interest rates that the Fed "cannot affect any individual price whether it be oil prices, whether it be food stuffs at the grocery store", but could ensure price rises do not broaden across the economy.
He added that strong jobs market and wider economy meant the Fed was focused on stablising prices, adding that those least well off had most to gain from lower inflation. Asked about the message the decision sent to Trump, Warsh chuckled before saying "I have got nothing for you on a discussion with the president," as he batted away similar questions with the same response. The Federal Reserve is independent of the government, but has faced sharp criticism from Trump over its decisions on rates in recent years.
Trump was heavily critical of Warsh's predecessor Jerome Powell, who stepped down at the end of his term earlier this year, for not cutting rates. Following Wednesday's announcement, Trump said rates should be cut to "1%, or less". "LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!", he posted on social media.
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