Federal Reserve Raises Rates 25 Basis Points to 3.75%-4% in First Hike Since 2023, Signals One More Move This Year

The Federal Reserve unanimously voted Wednesday to raise its benchmark interest rate by 25 basis points to a target range of 3.75% to 4%, marking the first increase in three years and the first of the Kevin Warsh era. The 12-0 vote defied direct pressure from President Trump, who subsequently called for rates to be cut to 1% or lower, saying America is "the best credit in the world." Warsh cited three developments that shifted the Fed's outlook since its July meeting: a stronger economy and labor market, inflation failing to improve sufficiently, and a changed assessment of geopolitical risks.

Warsh was blunt in his press conference, saying "the plain fact is that inflation is too high, and has been for too long," adding that summer data gave him "very little" reason to ease his concerns. He noted too many categories of goods and services are still posting price increases above 3% on both six- and 12-month measures, and that the Fed had dropped its earlier characterization attributing elevated inflation partly to supply shocks. The updated dot plot raised the median fed funds rate forecast to 4.1% at end-2026, up from 3.8% in June, with 12 of 18 officials penciling in one additional 25-basis-point hike this year, four expecting two more, and two seeing no further moves. Projections for 2027 and 2028 were also lifted, to 4.1% and 3.9% respectively, while the longer-run rate was revised up a tenth to 3.2%.

The Fed's updated economic projections showed 2026 PCE inflation revised up a tenth to 3.7%, core PCE up a tenth to 3.4%, and GDP growth nudged higher to 2.3% from 2.2%, while the unemployment forecast was trimmed to 4.1% from 4.3%. Warsh described the economy as resilient, said the labor market is in good shape with openings and hours increasing, and argued the Fed is more or less at full employment. He identified three forces behind rising bond yields: economic strength, surging capital expenditure creating intense competition for capital, and geopolitical risks. Warsh said the FOMC widely agreed that financial conditions are not restrictive, framing Wednesday's move as removing a dose of policy accommodation rather than imposing outright restraint.

Markets sold off sharply on the decision. The Dow fell roughly 400 points, with stocks closing lower across the board as traders began pricing in the possibility of even more hikes than officials projected. Short-term bond yields rose. Warsh sought to limit concern about the labor market, saying "we don't need to do harm to the job market to achieve our objective," and framed the hike as consistent with sustaining economic progress, including the ongoing surge in AI-driven capital investment. He said the Fed's independence is non-negotiable, calling it "a two-way street," in a pointed response to White House pressure.