Fed raises rates for first time in three years

The Federal Reserve increased its benchmark interest rate by a quarter point to about 3.9% on Wednesday, the first hike since 2023. The move aims to combat stubbornly high inflation.

Higher rates mean costlier borrowing

The rate increase will eventually lead to higher borrowing costs for mortgages, auto loans, and credit cards. This comes as Americans already struggle with expensive groceries, gas, and housing.

Second hike expected later this year

Fed projections signal the rate-setting committee expects to raise rates again later in 2026, potentially reaching 4.1%. Most analysts doubt this will happen at the October meeting.

Inflation remains above target

Fed Chair Kevin Warsh stated inflation is 3.7% compared to a year ago, well above the Fed's 2% goal. Core inflation, excluding food and energy, sits at 3.3%.

“The plain fact is that inflation is too high and has been for too long.”

Warsh defies Trump's rate-cut demands

Fed Chair Kevin Warsh previously suggested rate cuts, echoing Trump's calls for lower borrowing costs. Wednesday's hike marks a sharp reversal and directly contradicts the president's wishes.

Trump criticized Powell for same issue

Trump harshly attacked his previous Fed chair Jerome Powell for not cutting rates quickly enough. The Justice Department even launched a criminal investigation into Powell, though it was later dropped.

Warsh may have political protection

Warsh's father-in-law is Ronald Lauder, a billionaire Trump donor and friend. When asked about Trump's reaction, Warsh declined to comment on any discussion with the president.

Hassett expects Trump's displeasure

Trump's top economic adviser Kevin Hassett said on Fox News that Trump will not be happy about the rate hike but will defend Warsh's independence as Fed chair.

“I'm sure he's not going to be super happy about it, but he will defend the independence of Kevin Warsh above all.”

Iran war pushes gas prices higher

Ongoing disruptions from the Iran war have increased average gas prices more than 7% in just one month. These geopolitical shocks threaten to keep inflation stubbornly high across the economy.

AI investment adds to inflation

Ongoing investment in artificial intelligence has driven up prices for computer chips and other electronic gear. Tariffs are also elevating costs for appliances and other goods.

Consumers still spending despite gloom

Retail sales jumped 1.2% in August, showing consumers continue spending at healthy levels. This suggests current interest rates aren't restricting the economy enough to cool inflation.

Tech companies driving investment

Large technology companies are making strong investments in artificial intelligence data centers, contributing to resilient domestic spending. This economic strength supports the Fed's decision to raise rates.

Timing avoids midterm election impact

The Fed likely skipped an October rate hike due to its proximity to midterm elections seven weeks away. Affordability has become a leading issue in the upcoming elections.

Wall Street expects three hikes total

While the Fed projects two hikes this year, Wall Street investors forecast three total rate increases, with additional hikes expected in December and March of next year.