The Federal Reserve raised interest rates for the first time in more than three years on Wednesday, increasing its benchmark rate by a quarter percentage point as policymakers look to bring persistent inflation back toward the central bank’s 2% target.
The unanimous 12-0 decision lifted the federal funds rate to a range of 3.75% to 4%, marking the first rate increase since July 2023. The move comes as rising energy costs, tariffs and strong investment linked to the artificial intelligence boom continue to put pressure on prices.
The Fed said economic activity remains solid, with resilient domestic spending, strong productivity growth and robust capital investment. At the same time, it acknowledged that inflation remains elevated and that geopolitical uncertainty continues to weigh on the economic outlook.
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“Economic activity is expanding at a solid pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient,” the Fed said in its statement Wednesday.
“Inflation remains elevated. Today’s policy action will support a timelier return to the Committee’s 2 percent goal. The Committee will deliver price stability.”
The rate increase comes as higher fuel costs add another layer of pressure to the U.S. economy. Energy prices have climbed amid the ongoing U.S.-Israeli war with Iran, raising concerns that higher transportation and production costs could feed into broader inflation. Reuters reported that the Fed’s decision reflected concerns over inflation that has become broader than energy and import prices alone.
The latest move also signals that the Fed is not yet finished tightening monetary policy. Its quarterly projections show that 16 of the 18 policymakers expect at least one more rate increase before the end of 2026. The projections also point to interest rates remaining relatively high into next year.
The shift in expectations has been notable. Markets had moved sharply toward pricing in a rate increase as inflation data and rising oil prices changed the outlook ahead of the Fed’s September meeting.
Consumer prices increased 0.4% in August, the largest monthly increase in four months, while energy costs have continued to climb. Benchmark crude prices have remained elevated as the conflict involving the U.S., Israel and Iran continues to disrupt energy markets.
Higher fuel costs are also feeding into transportation expenses. Diesel prices have climbed sharply, putting additional pressure on industries that rely heavily on trucking to move goods across the country.
The increase in borrowing costs also comes as the 10-year U.S. Treasury yield has moved above the 5% level. The yield is closely watched because it influences borrowing costs across the economy, including mortgages, auto loans and other forms of consumer and business credit.
For Americans, the Fed’s decision could have mixed effects. Higher interest rates generally make borrowing more expensive, particularly for consumers carrying credit card balances or taking out adjustable-rate loans. Savers, meanwhile, can benefit from higher returns on products such as high-yield savings accounts and certificates of deposit.
The decision also puts the Fed at odds with repeated calls from President Donald Trump for lower interest rates. Trump has argued that the U.S. economy is strong enough to support significantly lower borrowing costs.
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About three hours after the Fed’s decision, Trump posted on Truth Social that “Interest Rates in the United States should be 1%, or less, because we are the Best Credit in the World — BY FAR. Our Country is BOOMING with new Investment!”
He added, “LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!”
The Fed’s decision comes less than two months before the U.S. midterm elections, putting renewed attention on inflation, borrowing costs and the central bank’s approach to monetary policy.
For the Federal Reserve, however, Wednesday’s decision centered on its mandate to maintain price stability. With inflation still above its 2% goal and policymakers signaling the possibility of another hike this year, the September increase could mark the beginning of a renewed period of tighter monetary policy rather than a one-time move.