Fed Policymakers Vote 12-0 To Hike Benchmark Interest Rates
As was widely predicted, the central bank’s Federal Open Market Committee voted 12-0 Wednesday to raise its benchmark interest rate by 1/4 percentage point to 3-3/4 to 4%.
It was the first rate increase in three years, and the committee signaled that another increase could come this year. The vote undid one of last year’s three rate cuts.
President Donald Trump has consistently called for the Fed to lower interest rates, and the vote was at odds with Trump’s wishes.
According to a statement, the committee decided to raise the target range for the federal funds rate in support of the Fed’s dual mandate: maximum employment and stable prices. The committee said it is continuing its policy of maintaining ample reserves in the banking system.
‘Inflation Remains Elevated’
“Economic activity is expanding at a solid pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient. Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little,” the Fed said in its statement.
“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 Fed said.
The move marked the Fed’s first increase in the fed funds rate since 2023, when the then-Jerome Powell-led central bank concluded its post-pandemic hiking campaign, CNBC noted.
Inflation has now remained above the Fed’s 2% target for more than five years, with the war in the Middle East serving as the latest driver of higher prices.
Stubbornly high inflation readings coupled with statements from Fed Chairman Kevin Warsh a few weeks ago in Wyoming had convinced Wall Street that the Fed would approve its first rate increase since July 2023.
Fed officials also nudged up their expectations for inflation this year.
They see the headline personal consumption expenditures price index at 3.7% and core excluding food and energy at 3.4%, both 0.1 percentage point higher than the last update in June, CNBC said. The Fed doesn’t expect to reach its inflation target until 2029, though it sees both measures dropping off sharply in 2027 – 2.3% for headline and 2.5% for core, CNBC reported.
Fed’s Feelings Shifted in August
The committee’s move toward a rate hike began in late August.
While the move was expected, CNBC noted the rationale behind the hike was unusual.
The central bank generally looks through the kind of inflation the economy is experiencing now, with the higher fuel costs from the Iran war and the lingering impacts from tariffs. However, CNBC said, officials in recent days have weighed the cost of continuing to look through the price increases, particularly in light of a stabilizing labor market.
CNBC said the committee lowered its outlook for the unemployment rate to 4.1%, down 0.2 percentage point from June.
