Fed raises benchmark rate by 0.25 percentage point, signals more hikes possible this year

The Federal Reserve raised its benchmark interest rate by 0.25 percentage point Wednesday, pivoting back to monetary tightening for the first time in more than three years. The move came as surging oil prices driven by the Iran war renewed inflationary pressure, while the US economy and labor market remained strong enough to absorb higher borrowing costs. The decision also opened the door to further rate increases before year's end, as Fed officials revised their rate forecasts upward.

The Fed announced Wednesday (local time) that the Federal Open Market Committee, at the conclusion of its two-day policy meeting, voted to raise the target range for the federal funds rate by 0.25 percentage point to 3.75–4.00% annually.

The rate increase — the first since July 2023, a gap of roughly three years and two months — was approved unanimously by all 12 voting members of the FOMC.

In its statement, the Fed said "inflation remains elevated" and that Wednesday's policy action "will help return inflation to the Committee's 2 percent objective on a more timely basis." The language signaled that officials view recent price pressures as more than transitory and see a clear case for tightening.

The Fed's assessment of the broader economy was upbeat. "Economic activity is expanding at a solid pace," the statement said, adding that "domestic spending has remained resilient" even as "uncertainty remains elevated due to geopolitical developments and other factors."

On the labor market, the Fed said job gains "are keeping pace with labor force growth" and that the unemployment rate "has changed little." Officials also noted strong productivity growth and solid capital investment — conditions that, alongside a resilient economy, gave the Fed room to tighten despite rising price pressures.

Fed officials also raised their interest rate forecasts. According to the Summary of Economic Projections released Wednesday, the median year-end benchmark rate forecast among FOMC participants rose to 4.1%, up 0.3 percentage point from the June projection.

Given that the current upper bound of the benchmark rate stands at 4.00%, the revised median suggests growing support within the Fed for at least one additional rate increase this year. The dot plot reflects each participant's individual assessment of the appropriate rate path given their economic and inflation outlook; the Fed does not disclose which participant submitted which projection.

The Fed also raised its inflation outlook. It now projects personal consumption expenditure inflation at 3.7% for this year, up 0.1 percentage point from its June forecast, reflecting the impact of the Iran war and the resulting spike in global oil prices on price stability.

At the same time, the Fed lifted its growth forecast. It now projects US real GDP growth at 2.3% this year and 2.4% next year — each up 0.1 percentage point from the June outlook — indicating that the US economy's growth momentum is proving stronger than previously expected even as inflationary pressures mount.

In line with the rate decision, the Fed's other policy rates were also raised across the board. The Fed's Board of Governors unanimously voted to increase the interest rate on reserve balances to 3.90%. The discount rate was raised by 0.25 percentage point to 4.00%. Both changes take effect Thursday.

The Federal Reserve Bank of New York will conduct open market operations to keep the federal funds rate within the 3.75–4.00% target range. The standing overnight repurchase agreement rate was set at 4.00%, and the overnight reverse repurchase agreement rate at 3.75%.

To maintain an ample level of reserve balances, the Fed said it may purchase short-term US Treasury securities as needed and may also purchase additional Treasuries with remaining maturities of three years or less. Principal payments from the Fed's Treasury holdings will be fully reinvested, and principal payments from agency securities will be reinvested in short-term Treasuries.

The Fed cut rates three times in 2024 — in September, November and December — and again three consecutive times last year, in September, October and December. It had held rates steady five consecutive times this year before Wednesday's increase marked a shift toward tightening.

The rate increase is also notable as the first adjustment under Fed Chair Kevin Warsh, appointed by President Donald Trump — and it is a hike, not a cut. Trump has repeatedly called on the Fed to lower rates ahead of the November midterm elections.

Markets had largely priced in the possibility of a rate increase, and US Treasury yields have climbed sharply in recent weeks. Attention will now turn to how the Fed assesses the durability of energy-driven inflation stemming from the Iran war, and whether it will follow through with another rate increase before the year is out.