US Federal Reserve Raises Rates, First Since 2023

Prices in the United States have stayed above the Fed's 2% target for more than five years, and annual inflation reached 3.4% in August. Much of the recent pressure stems from the war with Iran, which began in late February and sent oil and gasoline prices soaring; on the day of the decision, diesel hit a record average of $6.31 a gallon, according to AAA (the American Automobile Association). Higher rates make borrowing more expensive to cool spending, although Warsh admitted the Fed cannot control individual prices such as fuel, and some economists doubted the hike would ease pump prices. The decision also defied President Donald Trump, who had repeatedly demanded lower rates and afterwards called the Fed's board "hostile".

Some effects were immediate. Several major banks, including JPMorgan, raised their prime lending rate from 6.75% to 7%, pushing up the cost of credit cards and personal loans. Mortgage rates, which the Fed does not set directly, had already risen for four weeks, reaching an average of 6.95% on a 30-year fixed loan, just below 7% and the highest since January 2025, according to the mortgage buyer Freddie Mac; the hike could push them higher. Higher mortgage rates can add hundreds of dollars a month to a borrower's costs, and analysts warn this could keep many would-be buyers out of an already sluggish housing market. However, homeowners with existing fixed-rate loans will see no change in their monthly payments, and savers may earn better returns. Most Fed policymakers expect one further increase before the end of the year, and the European Central Bank (ECB) raised its own rates last week.