The Federal Reserve raised interest rates for the first time since 2023 on Wednesday, reversing course as the Iran war drives up global energy prices and fuels inflation.
The Fed raised the federal funds rate by 0.25 percentage points, bringing its target range to between 3.75% and 4% — its highest level since December 2025. The benchmark rate influences borrowing costs across the U.S. economy, including for credit cards, auto loans and personal loans.
In a set of quarterly projections, the Fed also signaled that its rate-setting committee expects to further raise rates later this year. The vote to hike rates was unanimous, the Fed said in a statement on Wednesday.
No rate hikes in 2027
For now, however, the Fed’s move doesn’t appear to signal the start of an aggressive rate-hiking campaign. Fed Chairman Kevin Warsh said Wednesday that policymakers expect to hold rates steady throughout 2027.
“For more than five years, inflation has been running above target,” Warsh said at a news conference after the rate announcement. “So our predominant focus is on the price stability side of our mandate. The plain fact is that inflation is too high, and has been for too long.”
About half of FOMC members predicted that rates would hold steady next year.
“We don’t think this is the beginning of another major tightening cycle, and markets have too much tightening priced in over the coming year,” Michael Pearce, chief U.S. economist at Oxford Economics, said in a research note.
By contrast, the central bank raised rates 11 times starting in 2022 as it sought to quash surging inflation as the economy was rebounding from the pandemic.
Still, the latest hike marks an about-face from the Fed’s stance at the start of the year, when inflation was cooling, and as many economists expected the central bank to lower interest rates throughout 2026. Instead, monetary policymakers are brandishing their most potent weapon to curb prices. The Consumer Price Index rose at an annual rate of 3.4% in August, far above the Fed’s 2% annual target.
President Trump has repeatedly called on the Fed to lower borrowing costs. But escalating conflict in the Middle East has disrupted crude oil production and supplies, pushing up fuel prices in the U.S. and driving up costs across the broader economy.
When asked on Wednesday how the president might react to the rate increase, Warsh said, “I’ve got nothing for you on a discussion with the president.”
In a Truth Social post on Wednesday after the Fed policy statement, Mr. Trump said U.S. interest rates “should be 1%, or less, because we are the Best Credit in the World — BY FAR.”
“LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!” he added.
Why stocks fell after Warsh comments
“Hiking was the right move, and it restores Fed credibility that the central bank will curb inflation no matter what the White House or anyone else says,” Heather Long, chief economist at the Navy Federal Credit Union, said in an email. “The big news is that the vote was unanimous and the forecast only signals one more hike in 2026.”
Higher interest rates can tamp down inflation because consumers pare spending and businesses reduce investment. That cools economic growth and tempers price increases as demand slows.
Stocks tumbled after Warsh said the U.S. economy “appears to be strengthening” and reiterated his pledge to tame inflation. Some investors interpreted his remarks as a sign that the central bank believes the economy can withstand additional rate hikes if they are needed to finally get inflation under control.
“Stocks declined after Warsh finished. Why? Warsh was hawkish today,” Long said. “How many more hikes beyond that remains an open question that likely will depend on the war in Iran and just how insatiable the data center building boom is.”
The Dow Jones Industrial Average slid 631 points, or 1.2%, to close at 51,462, while the S&P 500 lost almost 0.4%. The tech-heavy Nasdaq ended the day largely flat.
Higher borrowing costs
Banks are likely to respond to the latest Fed hike by boosting their interest rates on credit cards and other lending products, although a single 0.25 percentage-point increase might not significantly raise borrowing costs, according to financial experts.
Even so, the increase in borrowing costs comes as Americans are shouldering higher costs for gas, food and other essentials.
“Consumer sentiment is now 13% below where it was this time last year,” said Heather Boushey, professor of practice at the Kleinman Center for Energy Policy at the University of Pennsylvania, in an email. The Fed’s rate hike this week “will make it harder for families to borrow, raising the cost of car loans, credit cards, mortgages and more.”
