Washington (United States) (AFP) – The US Federal Reserve on Wednesday raised interest rates in the world’s largest economy by 25 basis points to tackle stubbornly high inflation, a move sure to anger President Donald Trump, who has demanded lower rates. The Fed’s Federal Open Market Committee voted unanimously to raise rates to between 3.75 and 4.00 percent, citing “elevated” inflation and adding that the rate hike would support a “timelier return” to its two-percent target for the metric.
A majority of Fed policymakers expect at least one more rate hike to be necessary before the end of the year, according to the central bank’s Summary of Economic Projections, also published Wednesday. The Fed last raised rates in 2023, when the central bank was still battling post-pandemic inflation. Fed Chair Kevin Warsh will address a press conference following the announcement.
The US economy has been dealing with years of higher-than-target inflation, and prices have surged in the wake of Trump’s war on Iran, his signature tariff policies, and the ongoing AI boom. The Fed has held rates steady since January, choosing to wait to gauge the effects of energy price shocks and to let the impact of tariffs on prices ripple through the economy. At its last meeting in July, however, a quarter of the committee’s voting members dissented from the decision to hold pat, calling for an immediate hike.
Since then, other policymakers — including Warsh — had hinted that if inflation did not meaningfully slow, the Fed may need to intervene. On Friday, August’s consumer price index came in at 3.4 percent — unchanged from the month before, but still well above the Fed’s long-term two-percent target. In its SEP, the Fed raised its forecast for its preferred gauge of inflation — the Personal Consumption Expenditures (PCE) price index — by 0.1 percentage points to 3.7 percent by year-end.
Inflation “has spread across the economy and is becoming embedded in consumer and firm behavior — exactly what the Fed must prevent,” said Diane Swonk, chief economist at KPMG, in a note before the Fed’s decision was announced. The Fed also raised its projection for GDP growth by year-end to 2.3 percent, up 0.1 percentage point.
**- Political implications -** Markets, which had largely priced in Wednesday’s rate hike, welcomed the decision without showing much movement on Wall Street’s main indexes. Yields on 10-year US Treasury bonds — which have surged in recent days as uncertainty on long-term inflation has spiked — were also little changed.
The fresh hike will be sure to anger Trump, who has launched an unprecedented campaign to pressure the independent central bank to lower rates in order to spur economic activity. The Trump administration launched a criminal probe against Warsh’s predecessor Jerome Powell — whom the president regularly insulted and berated — and is still trying to fire Fed Governor Lisa Cook. On Tuesday, key Trump economic advisor Kevin Hassett advocated against a rate hike but said the White House would “understand and respect the decision.”
Warsh was named to his position after a contentious Senate confirmation process, where Democratic lawmakers accused him of being a “sock puppet” for Trump, which he denied. So far, Trump has supported Warsh, claiming that the Fed chair wants lower rates and accusing the board of being “political.”
The Fed has a dual mandate to deliver maximum employment while keeping inflation to its long-term two-percent target. It mainly achieves these goals by setting the key US interest rate — lower rates tend to spur economic activity but fuel inflation, and hiking them cools both activity and prices. The Fed’s SEP showed that at least 12 of 18 policymakers who participated in the projection expected one more rate hike would be required before the end of the year. Four policymakers expect two more rate hikes to be required. Warsh has criticized the Fed’s policy of offering such projections in the past and did not participate in the previous iteration in June. This projection also included only 18 policymakers, suggesting he had once again withheld his contribution.
© 2024 AFP
