The Fed Raised Rates 12-0 to 3.75%-4%, Its First Hike Since July 2023, and 16 of 18 Officials Want Another Before Christmas. Warsh Said Inflation Has Been 'Too High for Too Long.'

The Federal Reserve raised its benchmark interest rate by a quarter percentage point on Wednesday, to a target range of 3.75% to 4%, the central bank's first increase since July 2023 and a direct rebuff to President Trump, who had spent the run-up to the meeting demanding cuts. The Federal Open Market Committee approved the move 12-0, a show of unity after three members had dissented in favor of a hike when the committee held rates steady in July.

"Inflation remains elevated," the committee said in a statement that ran barely a paragraph, in keeping with the stripped-down style Chairman Kevin Warsh has adopted since taking office in May. "Today's policy action will support a timelier return to the Committee's 2 percent goal. The Committee will deliver price stability." The statement described economic activity as expanding "at a solid pace," with resilient domestic spending, strong productivity growth and robust capital investment, and said job gains "have kept pace with the workforce."

At his press conference, Warsh said inflation has been "too high ... for too long." "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." Consumer prices rose 3.4% in the year through August, and core inflation picked up from July, a report that pushed market odds of a hike above 90%. Gasoline is about 45% more expensive than it was in February, when the war with Iran began, and West Texas Intermediate crude traded at $106 a barrel on Tuesday.

The Fed's updated projections signal that Wednesday's move is not the last. On the so-called dot plot, 16 of 18 participants penciled in at least one more increase this year, and four of them see two. Warsh has declined to submit a dot since becoming chairman. The median projection puts the federal funds rate at 4.1% at the end of 2026 and 2027, then falling to 3.9% in 2028 and 3.6% in 2029. Officials raised their inflation forecast for this year to 3.7% for the headline personal consumption expenditures index and 3.4% for core, both a tenth higher than in June, and do not expect to reach the 2% target until 2029. They also lowered their year-end unemployment forecast to 4.1% from 4.3%.

The politics are unusual. Trump nominated Warsh, a former Fed governor, precisely because he wanted lower borrowing costs, and in May told him, "Don't look at me, don't look at anybody, just do your own thing and do a great job." As the hike came into view, the president's tone shifted. On September 4 he said the country "should be at 1% or a half a percent ... We shouldn't be at 4%," and on Truth Social he wrote that "high interest rates put the U.S.A. at a very unfair disadvantage, and I won't allow that to happen!" and told the Fed board to "BE PATRIOTS for a change." He has also threatened to halt trade with countries that run surpluses with the United States if rates do not fall. Even so, on August 31 he said of Warsh, "I have a lot of respect for him and he'll do what he has to do," and Council of Economic Advisers Chairman Kevin Hassett said this week that Trump "100% respects the independence of Kevin Warsh."

Wall Street took the decision in stride. The S&P 500 rose after the announcement and Treasury yields fell, a sign that investors were reassured by the Fed's willingness to act. The 10-year yield had climbed about a quarter point since Warsh's Jackson Hole speech on August 28, in which he warned that the Fed had not yet brought inflation under control, and about a full percentage point from its February low. The average 30-year fixed mortgage rate reached 7.19% this week, up 38 basis points since Jackson Hole and more than a point higher than a year ago, according to Mortgage News Daily.

The decision marks a departure from the Fed's usual practice of looking through supply shocks such as energy spikes and tariffs. Officials have grown worried that the duration of the oil shock could unanchor inflation expectations, and the memory of the "transitory" misjudgment of 2021 is still fresh. Not everyone agrees. Mark Zandi of Moody's warned before the meeting that a hike risked "layoffs, rising unemployment, and igniting a self-reinforcing negative cycle." But Michael Feroli of JPMorgan argued that Warsh's "repeated stern warnings on inflation intolerance risk institutional credibility absent some action," and Deutsche Bank's Matthew Luzzetti said a single hike rarely has a meaningful effect, which is why the Fed usually does not stop at one.