The US Federal Reserve raised its benchmark interest rate by 25 basis points to 3.75% to 4.00% on Wednesday and signalled further tightening as inflation remains elevated.
The increase was the Fed’s first rate hike in three years and the first policy shift under Chair Kevin Warsh, who took office in May after being selected by President Donald Trump.
New economic projections showed 16 of 18 policymakers expect at least one more 25-basis-point increase by the end of 2026. The median projection puts the policy rate at 4.00% to 4.25% at the end of both 2026 and 2027.
“Inflation remains elevated. Today’s policy action will support a timelier return to the committee’s 2% goal,” the Federal Open Market Committee said.
Warsh said the decision reflected stronger economic activity, resilient domestic spending, strong productivity and robust capital investment.
“There’s been a pretty wide-ranging set of data, including the labor markets, that the economy has strengthened,” he said.
The Fed raised its 2026 inflation forecast to 3.7% from 3.6% previously and now expects inflation to return to its 2% target only in 2029, a year later than previously projected. Growth was upgraded slightly to 2.3%, while the unemployment rate is expected to end the year at 4.1%.
Financial markets reacted quickly, with the US dollar strengthening and two-year Treasury yields rising to their highest level in more than two years.
Trump renewed his call for substantially lower interest rates following the decision, saying rates should be cut to 1% or below.
The Fed’s statement also dropped its previous reference to elevated inflation being driven by “supply shocks”, particularly in the energy sector, suggesting policymakers see price pressures as broader and more persistent.
Reuters
