Fed raises rates, signals more hikes ahead as inflation persists

The US Federal Reserve on Wednesday raised its benchmark interest rate by 25 basis points to 3.75%-4.00%, its first rate hike in three years, as persistent inflation prompted the central bank to signal further monetary tightening, according to agnecy reports. The decision was unanimous and marked the first policy move under new Fed Chair Kevin Warsh.
The Fed said inflation remains elevated and that the latest action would support a “timelier” return to its 2% target. Policymakers pointed to resilient domestic spending, strong productivity, robust capital investment and steady job gains as signs of continued economic strength.The updated projections showed 16 of 18 policymakers expect at least one more quarter-point rate hike this year, putting the projected policy rate at 4.00%-4.25% by year-end. The Fed expects the rate to remain at that level through 2027.
Policymakers also raised their 2026 inflation forecast, measured by the Personal Consumption Expenditures Price Index, to 3.7% from 3.6% in June. Inflation is now projected to return to the Fed’s 2% target only in 2029. Economic growth was revised up slightly to 2.3%, while the unemployment rate is projected at 4.1% at the end of the year.The rate decision comes amid several inflationary pressures, including US import tariffs, higher energy costs linked to the conflict involving Israel and Iran, and strong capital spending associated with the artificial intelligence boom. Warsh said the economy had strengthened, citing resilient domestic spending, productivity and investment.
President Donald Trump, who has repeatedly called for much lower interest rates, reacted by saying US rates should be “1%, or less.” His response underscored the policy differences between the administration and the Fed as the central bank prioritises bringing inflation under control.Financial markets reacted swiftly, with the dollar strengthening and two-year US Treasury yields rising to their highest level in more than two years following the Fed's decision and projections.