The Federal Reserve raised its benchmark interest rate by a quarter point this week, the first increase in more than three years, and signalled that another may follow as oil-driven inflation keeps prices high.
The first hike since 2023
All 12 members of the Federal Open Market Committee voted for the move, which lifts the overnight funds rate to a target range of 3.75% to 4%. It was the first increase since July 2023 and came after five meetings this year where rates were left unchanged. Chair Kevin Warsh told reporters that inflation is too high and has been for too long, while warning that the decision would not immediately lower prices at grocery stores or petrol pumps.
Oil is doing the damage
The trigger is energy. Brent crude has traded above $100 a barrel and moved higher during September as fighting around the Red Sea and the effective closure of the Strait of Hormuz disrupted exports. Benchmark Treasury yields reached a 19-year peak as investors priced in a longer fight against inflation. Policymakers now see headline inflation at 3.7% this year and core inflation at 3.4%, both a little higher than their June forecast, and do not expect to reach their 2% target until 2029.
What households and markets should expect
Most committee members pencilled in two increases this year, which points to a possible move in December; many economists expect the Fed to skip October because of its proximity to the midterm elections. Borrowing costs for mortgages, car loans and credit cards follow the policy rate up, at least in part, while savers are being offered the best certificate-of-deposit rates in years. Investors face a harder question: whether an economy that added 162,000 jobs in August can carry higher rates without stalling.