The US Federal Reserve has raised interest rates by 0.25 percentage points, bringing its benchmark federal funds rate to a target range of 3.75% to 4.00% as the central bank moves to contain renewed inflationary pressures in the US economy.
The decision, taken unanimously by the Federal Open Market Committee, marks the first US interest-rate increase in more than three years and the first rate hike under Federal Reserve Chairman Kevin Warsh.
In its official statement, the Fed said that economic activity continues to expand at a solid pace, with domestic spending remaining resilient, productivity growth strong and capital investment robust. Job gains have continued to keep pace with growth in the workforce, while unemployment remains relatively low at 4.1%. At the same time, inflation remains well above the Federal Reserve’s 2% target.
Fed Chairman Kevin Warsh said that the Federal Reserve would “deliver price stability”, arguing that the strength of the labour market gives the central bank room to concentrate more heavily on inflation. He reiterated that high and persistent inflation ultimately inflicts the greatest damage on households that are less financially well off, as rising prices for essentials erode purchasing power.
The Federal Reserve’s latest projections also point towards further tightening. Sixteen of the 18 policymakers submitting forecasts expect at least one additional quarter-point increase before the end of 2026, which would bring the benchmark rate to between 4.00% and 4.25%.
The Fed also revised its inflation outlook higher. Its preferred measure of inflation, the Personal Consumption Expenditures Price Index, is now expected to stand at 3.7% by the end of the year, compared with the 3.6% forecast in June. Policymakers do not currently expect inflation to return fully to the 2% target until 2029.
At the same time, the Fed slightly improved its assessment of the wider economy, raising its forecast for economic growth this year from 2.2% to 2.3%, while lowering its projected unemployment rate from 4.3% to 4.1%.
US government bond yields, which have risen sharply amid fears of persistent inflation and higher interest rates, remained close to multi-decade highs following the announcement. The benchmark 10-year US Treasury yield was trading at around 4.98%, having crossed the 5% level earlier in the week and reached its highest levels since 2007.
Shorter-term bonds, reacted more strongly. The two-year Treasury yield rose by around three basis points to approximately 4.69%.
You can read the statement here.
Press conference here.
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