Adds comments from Warsh, other information
US Federal Reserve policymakers raised their target interest rate by a quarter point today, the first hike since late 2023, citing "elevated" uncertainty due, in part, to "geopolitical developments."
The Fed's Federal Open Market Committee (FOMC) raised the federal funds rate to 3.75-4pc, after holding the rate unchanged through five prior meetings this year.
"Price stability is foundational to economic growth," Fed chair Kevin Warsh told reporters after the meeting. "We took an important step today to deliver it."
In response to a question regarding rising borrowing costs, Warsh said the American economy appears to be strengthening, citing an increased demand for capital — an apparent reference to the artificial intelligence-fueled buildout of data centers.
In their median estimates in their economic projections, officials penciled in one more likely quarter-point rate hike this year, with no hikes next year, even as eight of 18 survey participants forecast an additional hike next year.
"While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient," the FOMC statement said. "Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce... Inflation remains elevated."
The rate hike comes as renewed fighting in the Mideast Gulf is intensifying a global energy squeeze that began with the start of the war at the end of February. It also comes less than two months before key midterm elections expected to cost President Donald Trump control of at least one of the two houses of congress.
In their median estimates, officials project inflation, as measured by the PCE index, to end the year at 3.7pc, slowing to 2.3pc next year and to 2.1pc in 2028, up slightly from their 2pc long term target. They estimate GDP growth to end the year at 2.3pc, compared with 2.2pc in the prior projections in June. Unemployment is expected to end the year at 4.1pc, down slightly from 4.2pc in the June forecast.
Ahead of the meeting Wednesday, the CME's FedWatch tool had a given 92pc probability that the Fed would raise rates by a quarter point, up from 33pc odds a month earlier.
The latest move followed rate cuts of 75 basis points over the last three FOMC meetings of 2025, as the Fed continued to normalize rates from two-decade highs reached in the aftermath to the post-Covid-19 runup in inflation. But mounting policy uncertainty unleashed by Trump's tariff wars, a crackdown on immigrants and erratic spending policies had prompted the Fed to remain on hold throughout 2026 until Wednesday's decision. Over that period, Trump repeatedly attacked then-Fed chair Jerome Powell for resisting pressures to lower rates. Powell stepped down as planned in May, and was replaced by Warsh, a former banker and Fed governor who had been viewed as a critic of Fed rate policy as well as an inflation hawk. Wednesday's FOMC decision is the first rate change since Warsh took office.
Financial markets have grown increasingly skittish this year. The yield on the US 10-year Treasury note tipped past 5pc on Wednesday for a third day, the highest intraday levels since 2007. The higher rates increase borrowing costs for consumers and businesses. Bond yields are surging on rising debt levels amid increases in spending on defense and artificial intelligence and concerns the energy crisis unleashed by the Mideast Gulf war will deepen.
The consumer price index rose at a 3.4pc annual rate in August, the same as July. But gasoline prices rose by an annual 27.4pc in August, up from 24.6pc, while fuel oil prices rose by 52pc.
