The Federal Reserve raised the benchmark interest rate by a quarter percentage point to a range between 3.75% and 4%, citing stubborn inflation and a desire to achieve price stability. This move was widely expected and marks the first tightening in three years.
The Federal Open Market Committee made this decision unanimously, with most officials forecasting one more rate increase this year. The committee aims to curb inflation, which has been fueled by tariffs and a surge in energy prices.
Inflation remains high, according to the FOMC, and the committee believes that today’s policy action will support a timelier return to the 2% goal. The FOMC stated that it will deliver price stability, despite criticism from President Donald Trump.
Reaction to the Rate Hike
President Trump has repeatedly called on the Fed to cut the main interest rate, regardless of price pressures. He spoke with Fed Chair Kevin Warsh before the FOMC decision, telling him that the board’s decision wouldn’t matter due to its perceived hostility and political nature.
Warsh did not discuss his conversation with Trump or react to Trump’s views on rates during a press conference following the FOMC meeting. Instead, he emphasized the importance of the Fed’s independence, stating that part of the independence of the Federal Reserve is staying in its lane.
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Warsh noted that the economy is strengthening, with improved new hiring, private sector earnings, and business capital investment. He also mentioned that credit flows to businesses are robust, and that broad financial conditions are not restrictive.
Outlook and Projections
Fed officials expect the federal funds rate to end both this year and 2027 at 4.1%, according to median projections. The core personal consumption expenditures price index is expected to end this year at 3.4% and slow to 2.2% in 2028.
The unemployment rate is expected to hold steady at 4.1% through 2029, while the U.S. economy is projected to grow 2.3% this year and 2.4% next year. Inflation has persisted above the Fed’s 2% goal for more than five years, and surveys show that consumers expect price pressures to rise in the future.
Higher energy prices, such as the average price for a gallon of gasoline rising to $4.37 from $4.07 for a 7.4% gain, have pushed up inflation across the economy. The consumer price index, excluding volatile energy and food prices, edged up 0.1 percentage point last month to 0.3%.
