The Federal Reserve raised interest rates for the first time in three years in a unanimous decision on Wednesday, with central bankers now seeing a second hike this year to arrest sticky inflation.
The Federal Open Market Committee voted to raise its benchmark interest rate to the range of 3.75% to 4% from 3.5% to 3.75%, the first rate hike since July 2023, as renewed tensions in the Middle East drive oil prices higher and raise concerns about broadening price pressures.
“We now have data broadly defined that says the economy has indeed strengthened,” Fed Chairman Kevin Warsh said in a press conference following the meeting. “Underlying growth is higher. Inflation is the problem. Stable prices have been the problem for, now, more than five and a half years.
“So what the committee decided to do today was take an action to ensure a timely return to our price stability.”
Noting that the economy is essentially at full employment, Warsh said he thinks the Fed can tame inflation without depressing growth.
“I don’t believe that we need to do harm to the labor markets to achieve our objective,” he said. “I don’t believe that the two parts of our mandate — price stability and full employment — are working at cross purposes over the medium term.”
Dot plot projects another hike in 2026
In their updated summary of economic projections, officials now see one more rate hike this year. That compares with expectations in June, when half of the committee expected they would need to raise rates once this year, while the rest thought they could hold rates steady. Warsh didn’t show his hand, declining to participate in the so-called dot plot for the second time.
For 2026, 12 officials see two rate hikes, four see three rate hikes, while two see one rate hike.
The median of 18 Fed officials projects holding rates steady in 2027, after two hikes this year, followed by one cut in 2028.
Headline inflation is now seen rising 3.7%, compared with 3.6% previously. On a “core” basis, officials see inflation at 3.4%, compared with 3.3% previously. Officials don’t see inflation dropping back to their 2% goal until after 2028.
The latest Consumer Price Index reading showed prices rose 0.3% in August month over month on a “core” basis, which strips out volatile food and energy prices to better gauge underlying inflation. That was an acceleration over the prior two months, and a hair faster than the 0.2% threshold many officials said they’d need to see to be convinced inflation is slowing on its own.
“The plain fact is that inflation is too high and has been for too long. This summer’s inflation readings do not tell me that underlying trends have meaningfully improved,” Warsh said in the press conference.
The Fed expects a slightly stronger economy, with GDP growing 2.3% versus 2.2% previously. The unemployment rate is projected at 4.1%, down from prior expectations of 4.3%. Unemployment currently stands at 4.1%.
Officials noted in their statement that uncertainty remains elevated in part due to geopolitical developments, but that domestic spending has been resilient.
The Fed’s actions come nearly seven weeks before the midterm elections, at a time when President Trump has relentlessly urged the central bank to cut rates, warning he might otherwise halt trade with countries maintaining trade surpluses with the US. Treasury Secretary Scott Bessent has similarly argued that recent inflation reflects a temporary supply shock from higher oil prices and tariffs that is washing through.
By voting to raise rates on Wednesday, Warsh signaled for the first time his willingness to break from Trump.
“As I said at the policy symposium in Jackson Hole, I would be hard-pressed to describe broad financial conditions as restrictive,” he said. “This view was widely shared by the committee, so we removed a dose of accommodation.”
Jennifer Schonberger is a veteran financial journalist covering markets, the economy, and investing. At Yahoo Finance, she covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance. Follow her on X @Jenniferisms and on Instagram.
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