The US Federal Reserve (Fed) raised its benchmark interest rate by 0.25 percentage points on Wednesday to the range of 3.75%-4%, the first increase in over three years, and signaled the possibility of another hike by the end of the year in an attempt to combat inflation fueled by rising oil prices and other factors.
The Federal Open Market Committee (FOMC) unanimously approved the decision with a vote of 12-0, after three members had already advocated for a 25-basis point increase at the July meeting.
"Inflation remains high. Today's monetary policy action will support a quicker return to the Committee's 2% objective. The Committee will ensure price stability," the Fed conveyed, according to CNBC.
Fed Chair Kevin Warsh stated that inflation had been "too high... for too long" and that the central bank needed to be convinced that it was moving quickly enough toward the 2% target. He noted that the economy and labor market remained strong, but persistent inflation and tensions in the Middle East contributed to the unanimous decision.
16 out of 18 officials see another hike as possible
The new projections released by the Fed show that 16 out of 18 participants expect another interest rate increase this year, with four of them even considering two additional hikes. Two officials believe that the Fed will stop after the hike approved on Wednesday. Warsh did not present his own estimate in the individual projections chart.
There are no further hikes projected for the coming years: the projections indicate a rate cut in 2028 and at least one in 2029. However, opinions for 2027 are divided: eight officials anticipate another increase, six maintain the rate, and four predict reductions.
Meanwhile, the Fed also revised its inflation estimates for this year upwards. The overall Personal Consumption Expenditures (PCE) index is estimated at 3.7%, with core inflation at 3.4%, both 0.1 percentage points above the June forecasts. The central bank does not expect inflation to return to the 2% target before 2029.
Rising energy costs increase pressure on the Fed
The decision comes after the Fed had kept rates unchanged throughout this year. Typically, the central bank tends to look beyond temporary energy price increases, but officials are increasingly concerned that hikes caused by the war with Iran and the effects of tariffs could persist and spill over into the broader economy.
At the same time, the Fed lowered its unemployment rate forecast to 4.1%, 0.2 percentage points below the June estimate, indicating a stronger labor market than previously anticipated.
Markets had estimated a probability of over 90% for a 25-basis point hike before the meeting. Following the announcement, the S&P 500 rose, and Treasury bond yields fell.
However, borrowing costs remain high. The average interest rate for a 30-year fixed-rate mortgage had reached 7.19%, approximately 38 basis points higher than before Warsh's speech at the Jackson Hole on August 28 and over one percentage point higher than a year ago.