Fed raises rates to 3.75%–4%, first hike of the Warsh chairmanship

The Federal Reserve raised its benchmark interest rate by a quarter of a percentage point on 16 September, the first increase since July 2023 and the first policy move of Kevin Warsh’s chairmanship. All 12 voting members of the Federal Open Market Committee backed the decision. The new target range for the federal funds rate is 3.75 percent to 4 percent.

The hike reversed a cut made last December, when the committee set the range at 3.5 percent to 3.75 percent and then held it there through the first half of 2026. Markets had treated the outcome as close to certain. CME’s FedWatch tool put the probability of a quarter-point rise at 92.9 percent on the morning of the meeting.

Warsh, who took the chair in late May after President Donald Trump selected him, told reporters that summer inflation readings did not show a meaningful improvement in the underlying trend. “The plain fact is that inflation is too high and has been too high for too long,” he said. He pointed to core personal consumption expenditure inflation at 3.2 percent and a consumer price index print of 2.4 percent, together with a fresh rise in commodity prices after the Iran war pushed energy costs higher.

The committee’s accompanying Summary of Economic Projections, which Warsh said he did not himself submit, showed slightly stronger growth, a lower unemployment path and a higher year-end inflation outlook than in June. Officials now see real GDP rising 2.3 percent this year and 2.4 percent in 2027. They expect total personal consumption inflation of 3.7 percent in 2026, falling to 2.3 percent in 2027, with the unemployment rate holding steady.

The “dot plot” that records each participant’s rate path was more divided than the vote. A solid majority, 12 of 18 in one count and 16 of 19 in another, expect at least one more quarter-point increase at the October or December meeting. Four officials see two further hikes as justified. For 2027, about ten officials see rates on hold and eight pencil in another quarter point. The median official’s appropriate year-end funds rate is 4.1 percent this year and next.

Warsh declined to pre-commit. “I’m not in the forward guidance business,” he said. “I’m not going to prejudge any future decisions we make.” He described the step as removing “a dose of accommodation so that financial and credit conditions would be more consistent with our ultimate objectives.” He also said the American economy appeared stronger, citing hiring, private-sector earnings and business capital spending in recent months, which in his view gave the committee room to focus on prices.

The politics sit in plain view. Trump has pressed the central bank to cut borrowing costs and, after the announcement, attacked the rise as a decision made “only for political reasons.” He denied that Warsh had defied him and claimed he had advised the chair to vote as he did. During the contest for the job last year, Warsh had spoken about the possibility of lower rates. On Wednesday he aligned himself with the 2 percent inflation goal instead.

Energy is the variable that changed the arithmetic. The Iran war lifted oil and other commodity prices through the summer. Core CPI printed hotter than expected last week. Officials have treated that combination as a supply-and-demand problem rather than a one-off spike. If the next inflation prints cool, the October meeting could stay on hold. If they do not, the dots already show a committee prepared to move again before year-end.

For households and firms the immediate transmission is familiar. Credit-card, mortgage and business-loan pricing will reprice off the new floor. The dollar and Treasury yields typically firm on a hike of this kind, which matters for emerging-market borrowers and for India’s rupee and bond market in the days after the decision. The last time the Fed raised rates, in July 2023, the federal funds rate stood at a 22-year high. This cycle starts from a much lower peak and with a chair who has just told the public he will not trade price stability for political quiet.