US Federal Reserve raises interest rate by 25 bps to 3.75-4% range

On Wednesday, the Federal Reserve raised interest rates by a quarter of a percentage point to between 3.75 and 4.00 percent. This move, aimed at combating high inflation, was certain to incense President Donald Trump, who had previously requested lower rates. The Federal Open Market Committee unanimously agreed to the hike, citing elevated inflation and its potential to bring the rate to the Fed's desired 2 percent target.

Most Fed policymakers anticipate at least one further rate increase before the year's end, as indicated in the bank's latest Economic Projections. Fed Chair Kevin Warsh will deliver a press statement following the announcement. The US economy has been grappling with inflationary pressures for several years, with prices rising due to Trump's Iran war, trade policies, and the growing influence of artificial intelligence.

The Fed had maintained a steady rate since January, waiting to assess the impact of energy price surges and tariff-induced price fluctuations. However, four committee members had previously expressed dissent against holding rates constant, arguing for an immediate rate increase. On August, the Consumer Price Index stood at 3.4 percent, unchanged from the previous month but still above the Fed's 2 percent long-term objective.

The Fed also revised its forecast for inflation, measured by the Personal Consumption Expenditures (PCE) price index, to 3.7 percent by year-end. Inflation is now affecting various aspects of the economy and behavior of consumers and businesses, a situation the Fed aims to rectify. The Fed also increased its projected GDP growth for the year to 2.3 percent, up 0.1 percentage point.

The last rate increase occurred in 2023 amid post-pandemic inflation. This fresh hike is likely to provoke Trump, who has been campaigning aggressively to pressure the independent central bank to reduce rates and stimulate economic growth. The Trump administration has launched an investigation against Warsh's predecessor, Jerome Powell, and continues to seek the dismissal of Fed Governor Lisa Cook.

On Tuesday, prominent Trump economic adviser Kevin Hassett opposed a rate hike but stated that the White House would "respect and comprehend the decision." Warsh was appointed to his position after a contentious Senate confirmation process, with Democratic lawmakers accusing him of serving Trump's interests, a claim he denied. The Fed aims to balance maximum employment with inflation control by manipulating interest rates.

Rates typically stimulate economic activity but fuel inflation, while increases cool both activity and prices. The Fed's Economic Projections suggested that at least 12 out of 18 policymakers expected at least one additional rate hike before the year's end, with four expecting two more. Warsh had previously criticized the Fed's practice of presenting such projections and did not participate in the June iteration.