Fed raises rates for first time since 2023, defying Trump

The Federal Reserve on Wednesday raised its benchmark interest rates for the first time since 2023, in a move aimed at slowing inflation that picked up again last month.

The Fed’s hike of 0.25% brings the central bank’s flagship rate to between 3.75% and 4.00%.

The Fed’s policymakers unanimously supported the rate hike and signaled one more interest rate hike could come before the end of the year.

The Fed’s decision, which defied the president’s wishes for lower interest rates, comes in response to elevated inflation readings as the war with Iran drives up prices.

“Uncertainty remains elevated owing, in part, to geopolitical developments,” the Federal Reserve’s statement read. “Today’s policy action will support a timelier return to the Committee’s 2 percent goal.”

The hike could also be the start of a rate-hiking cycle. Historically, when a central bank raises rates once, it follows that up with additional increases.

“The plain fact is that inflation is too high and has been for too long,” Fed chairman Kevin Warsh said at a press conference in Washington following the announcement.

“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,” he said. “Today, the FOMC decided that this standard has not been satisfied.”

Released alongside the Fed’s rate decision today were economic projections. As of this week, all but two members of the Federal Open Market Committee forecast another rate increase later this year.

The rate hike comes despite years of demands by President Donald Trump for lower interest rates. In early February, Trump told NBC News that Warsh would not have gotten the nomination unless he wanted to lower rates.

Late Wednesday, Trump responded to the rate hike by demanding, “LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!”

Trump said the benchmark funds rate “should be 1% or less” because the U.S. has “the Best Credit in the World.” However, that is not accurate. Several countries, including Canada, Australia and Germany are all rated higher by S&P.

“Warsh and the committee are sending a clear message that the Fed will not tolerate inflation drifting further above target, even in the face of political pressure from the White House,” said Brian Rehling, co-head of global fixed income at Wells Fargo.

Warsh was asked by a reporter Wednesday what his message for the president was about the rate hike. “I’ve got nothing for you on a discussion with the president,” he replied.

But the war with Iran changed all of that, after the U.S. and Israel launched it Feb. 28. After less than four months on the job, Warsh is now presiding over a Fed that is increasing rates.

The Fed’s interest rate move comes after the Iran war sparked a massive surge in the price of oil this year. This has, in turn, sent gas prices higher by more than 45% since the Iran war began in late February.

These energy prices have helped push inflation up to 3.4% as of August, above average U.S. wage growth of 3.1%.

But Warsh was clear on Wednesday about the limits of the Fed’s power to impact direct cots consumers pay.

“We cannot affect any individual price, whether it be oil prices, whether it be foodstuffs at the grocery store,” Warsh told reporters.

“But what we can do, and will do, is ensure that any change in relative prices don’t broaden out, don’t have second and third order effects in the economy.”

As Warsh spoke, major stock indexes reversed their earlier gains and turned lower for the trading session.

The S&P 500 closed the day lower by 0.4%, while the Nasdaq Composite ended flat. The Dow fell 630 points, weighed down by sizable drops in shares of IBM, Goldman Sachs, Boeing and American Express.

Following Wednesday’s rate increase, the 30-year Treasury bond yield declined slightly, but remains at its highest level in years. The yield on the 10-year Treasury bond had fallen earlier in the day, but by 4 p.m. ET it was back up near its highest level since 2007.

Warsh attributed the recent surge in bond yields to three factors.

“First is economic strength,” he said. The second was “the situation in hotspots around the world,” an apparent reference to the Iran war and war in Ukraine, both of which have restricted global energy supplies. The third factor, he said, was competition for capital from artificial intelligence companies.