Washington (United States) (AFP) – The US Federal Reserve on Wednesday raised interest rates for the first time since 2023, defying President Donald Trump’s demand for cuts. Central bank chief Kevin Warsh stressed the need to combat inflation that has been “too high” for “too long.” The Fed’s Federal Open Market Committee voted unanimously to raise rates by 25 basis points to between 3.75 and 4.00 percent, stating that the rate hike would support a “timelier return” to its two-percent target for inflation.
Warsh, appointed by Trump, described the decision as a “serious” one, but one that needed to be made. “The plain fact is that inflation is too high, and has been for too long,” he told a press conference. Moreover, Wednesday’s rate hike may not be the last; the vast majority of Fed policymakers indicated that at least one more rate hike would likely be necessary before the end of the year, according to their Summary of Economic Projections.
US households and businesses have been battered by years of higher-than-target inflation, with prices surging due to factors such as Trump’s war on Iran, his signature tariff policies, and the ongoing AI boom. Trump has launched an unprecedented assault on the Fed’s independence since taking office, attempting to fire a Fed Governor and initiating a criminal probe against Warsh’s predecessor in his quest for lower rates to spur economic activity. The president’s Republican Party is facing a stern test in the upcoming midterm elections, with rival Democrats seeking to gain control of both houses of Congress, placing economic issues front-and-center for voters.
– Growing Calls for Hike –
The Fed had held rates steady since January, choosing to wait and gauge the effects of the Iran war’s energy price shocks and allowing the impact of tariffs on prices to ripple through the economy. However, since July, a growing faction of policymakers indicated that a rate hike may be necessary to tame inflation, as the war continued and prices remained elevated. 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.
Diane Swonk, chief economist at KPMG, remarked that inflation had “forced the Fed’s hand.” “Price pressures remain too elevated and too persistent for policymakers to look through, while the economy and labor market have held up well enough to absorb tighter policy,” she said. In its Summary of Economic Projections, 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. The Fed also raised its projection for GDP growth by year-end to 2.3 percent, an increase of 0.1 percentage points.
Warsh reiterated his belief in the “resilience” of the US economy, citing its strength as a marker of its ability to absorb tighter fiscal conditions.
– ‘Rather Unfortunate’ –
US stock markets largely priced in Wednesday’s rate hike, but they nonetheless fell on the news—an expected reaction to any rate increase as equities become less attractive. Yields on 10-year US Treasury bonds, which have surged in recent days due to uncertainty regarding long-term inflation, also crossed the five-percent threshold, indicating that uncertainty remains a factor. Following the Fed’s announcement, White House spokesperson Kush Desai described the decision as “rather unfortunate” and noted that Trump had been clear about wanting lower interest rates.
Warsh was appointed to his position after a contentious Senate confirmation process, during which Democratic lawmakers accused him of being a “sock puppet” for Trump, a claim he denied. So far, Trump has supported Warsh, claiming that the Fed chair wants lower rates while accusing the board of being “political.” The Fed has a dual mandate to deliver maximum employment while keeping inflation at 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, while hiking them cools both activity and prices.
The Fed’s Summary of Economic Projections indicated that at least 12 of the 18 policymakers who participated in the projection expected one more rate hike would be necessary before the end of the year, with four policymakers expecting two more rate hikes. Warsh has criticized the Fed’s policy of providing 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
