U.S. Federal Reserve raises interest rates for 1st time in 3 years

Federal Reserve Board Chairman Kevin Warsh speaks during a news conference at the Federal Reserve in Washington, in July. (Mark Schiefelbein/Associated Press)Social SharingThe Federal Reserve raised its benchmark interest rate Wednesday for the first time since 2023 in an effort to quell stubbornly high inflation, a move that could spur a sharp response from the White House.

The quarter-point increase lifts the Fed's key rate to about 3.9 per cent and, over time, could result in higher borrowing costs for American mortgages, auto loans, and credit cards. In a set of quarterly projections, the Fed also signalled that its rate-setting committee expects to hike rates a second time later this year, to 4.1 per cent.

"Today's policy action will support a timelier return" to the central bank's two per cent inflation goal, the Fed said in a statement.

The move comes as Americans are already struggling with high costs for groceries, gas and housing. Affordability has taken on a leading role in the upcoming midterm elections, just seven weeks away.

The rate hike is a surprising turnaround for Fed Chair Kevin Warsh, who was appointed by U.S. President Donald Trump and took over the top job in May. While under consideration by Trump last year, Warsh often suggested the Fed could reduce its key rate, echoing the president's call for lower borrowing costs.

And in April, when Warsh's nomination was under consideration by the Senate Banking Committee, Trump said in a television interview that he would be disappointed if Warsh didn't cut rates. On the same day, however, Warsh told the committee he had not promised Trump he would cut rates and said he would be "an independent actor" as Fed chair.

Will Bessent's bond market intervention make U.S. inflation worse? | About That

Yet the ongoing disruptions from the Iran war, which have pushed up average gas prices more than seven per cent from just a month ago, threaten to spread through the economy and keep broader inflation stubbornly high. An inflation report last week showed core prices, which exclude food and energy, accelerated slightly in August.

According to the Fed's preferred measure, inflation was 3.7 per cent in July compared with a year earlier.

Earlier Wednesday, the government said retail sales jumped 1.2 per cent in August from the previous month, a sign consumers are still spending at healthy levels despite sentiment surveys indicating Americans remain gloomy about the economy. Strong spending is a sign that interest rates at current levels aren't necessarily restricting the economy enough to cool inflation.

U.S. Senate votes to approve Trump's pick for Federal Reserve chair

"While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient," the Fed said, likely referring to ongoing consumer spending and strong investment in AI data centres by large technology companies.

Kevin Hassett, Trump's top economic adviser, was asked in an interview with Fox News on Sunday how Trump might react to a rate hike.

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

More hikes are also possible. Wall Street investors have forecast three hikes in total, with additional increases in December and March.