Dive Brief:
- The Federal Reserve, in a widely expected decision, raised the benchmark interest rate by a quarter percentage point Wednesday, pledging to curb stubborn inflation and achieve price stability.
- The Federal Open Market Committee in a unanimous decision increased the federal funds rate to a range between 3.75% and 4% in its first tightening in three years as tariffs and a war-induced surge in energy prices fuel inflation above the central bank’s 2% target. Most Fed officials forecast one more rate increase this year.
- “Inflation remains elevated,” the FOMC said in a statement after a two-day meeting. “Today’s policy action will support a timelier return to the committee’s 2% goal,” the FOMC said, adding “the committee will deliver price stability.”
Dive Insight:
The monetary tightening provoked criticism from President Donald Trump, who has repeatedly called on the central bank to cut the main interest rate regardless of price pressures.
In comments to reporters, Trump said he spoke with Fed Chair Kevin Warsh before the FOMC decision and told him “you might as well vote with the board because it’s just not going to matter.”
“The board is very hostile. They’re very political. They’re doing the wrong thing. They’re a bunch of politicians. They are people put on by politicians,” Trump said, according to The New York Times.
In a press conference following the FOMC meeting, Warsh did not discuss his conversation with Trump, react to Trump’s view on rates or comment in detail on the independence of the Fed from external pressure.
“Part of the independence of the Federal Reserve is we stay in our lane,” Warsh said. “Independence is a two-way street –– we let people that do trade policy and fiscal policy stay in their lane too,” he said.
Policymakers raised the main rate while noting that the economy is strengthening, Warsh said.
“New hiring, private sector earnings, business capital investment — each of these markers has improved in recent months and is pointing in a good direction,” he said, noting “robust” credit flows to businesses.
“I would be hard pressed to describe broad financial conditions as restrictive,” he said. “This view was widely shared by the committee, so we removed a dose of accommodation.”
Policymakers also saw a need to increase the main rate given persistent geopolitical turmoil and signs that inflation has not slowed since July, Warsh said.
“Today’s action starts to show that we’re serious about this, and we will deliver on the price stability objective,” Warsh said. “And as the statement said, we’ll do it on a timelier basis.”
In a median projection, Fed officials expect the federal funds rate to end both this year and 2027 at 4.1%, according to estimates released by the central bank.
The core personal consumption expenditures price index, the Fed’s preferred inflation measure excluding volatile food and energy prices, will end this year at 3.4%, and 2027 at 2.5%, before slowing to 2.2% in 2028, according to the median projection.
Fed officials do not see core PCE falling to their 2% goal until 2029. The unemployment rate will hold steady at 4.1% through 2029, and the U.S. economy will grow 2.3% this year and 2.4% next year, according to the median projection.
Inflation has persisted above the Fed’s 2% goal for more than five years and, in recent weeks, surveys have shown that consumers expect price pressures to rise in the future.
Fed officials closely track inflation expectations, believing that such attitudes can be self-fulfilling.
Higher energy prices stand out as one of the more flagrant signs of accelerating inflation. The average price for a gallon of gasoline has risen during the past month to $4.37 from $4.07 for a 7.4% gain, according to AAA.
Higher fuel prices have pushed up inflation across the economy. The consumer price index, excluding volatile energy and food prices, edged up 0.1 percentage point last month to 0.3%, the Bureau of Labor Statistics said Friday. The CPI increase exceeded forecasts.
Editor’s note: This story was updated with comments from President Trump.
