Fed raises interest rates for first time in 3 years, battling persistent inflation

The Federal Reserve raised interest rates Wednesday for the first time in three years as inflation continues to dog the economy, largely driven by soaring gas and fuel oil prices while the war in Iran drags on.

The central bank's Federal Open Market Committee voted 12-0 to increase its benchmark interest rate by a quarter of a percentage point, reaching the new range from 3.75% to 4% and making the cost of borrowing more expensive for Americans.

The committee released an upbeat statement touting economic growth 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," according to the statement released Wednesday afternoon.

"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 statement continued.

Federal Reserve Chair Kevin Warsh, four months into his tenure, described Wednesday's unanimous decision to raise rates as "sober."

"The plain fact is that inflation is too high, and has been for too long," Warsh said during a press conference following the Fed's meeting.

"This summer's inflation readings do not tell me that underlying trends have meaningfully improved. … Too many categories are still posting increases above 3 percent on both a six and 12-month basis," Warsh said.

Trump campaign for lower rates

President Donald Trump publicly pressured and name-called Warsh's predecessor Jerome Powell for months for not lowering interest rates.

The public attacks escalated into a federal probe of Powell and the Fed for costly renovations at the Fed's headquarters in Washington. The administration eventually dropped the investigation.

Trump criticized the rate increase on his Truth Social platform Wednesday afternoon, saying the U.S. rates "should be 1%, or less, because we are the Best Credit in the World — BY FAR."

"Our Country is BOOMING with new Investment! If we stopped Trading with every country that we have a Deficit with, which is most of them, we would make, at least, 1.5 Trillion Dollars a year. The word "Deficit" is nothing more than a fancy word for LOSS. We are "carrying" almost every country in the World, and that cannot go on any longer. LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!," he wrote.

Warsh declined to answer questions from reporters about Trump's previous calls for lower interest rates.

"Part of the independence of the Federal Reserve is we stay in our lane," Warsh said.

The interest hike comes less than a week after the government's latest consumer price index revealed the cost of food, energy, housing and other goods and services rose 0.4% from July to August. The cost of all items over the past year has risen 3.4%.

Rep. Jason Smith, the Republican chair of the tax-writing House Ways and Means Committee, criticized the decision, saying in a statement that "interest rates should be coming down, not going up."

The Missouri Republican praised the Trump-led "big beautiful bill" tax law passed last summer for delivering "larger paychecks" to Americans, and he blamed former President Joe Biden for past higher inflation.

"After years of elevated borrowing costs, a rate increase is the opposite of the relief families and small businesses need. As President Trump works to restore stability in the Middle East and bring down energy prices, the Fed should recognize the progress," Smith said in a written statement Wednesday afternoon.

Soaring gas prices

Spiking energy prices caused by the war in Iran were the main driver behind higher costs. Gasoline alone rose 3.9% over the month of August.

As of Wednesday, Americans were paying an average of nearly $4.37 a gallon at the pump, according to AAA. Diesel prices reached a record high of $6.31.

The price of a barrel of oil surged above $100 in recent days, including Wednesday afternoon, when it reached $105, as fighting flared in the Middle East.

The United States and Iran continue launching rockets in the Strait of Hormuz, where one-fifth of the world's petroleum traveled prior to the war. U.S. Central Command claimed Sept. 8 that it "destroyed" five Iranian crude oil carriers as part of its naval blockade aimed at damaging Iran's economy.

The conflict spilled over in July into another key waterway for Saudi Arabian oil exports. Iran-backed Houthi rebels restarted an assault on commercial vessels in the Red Sea for the first time since 2024, and are fighting for control of the Bab al-Mandab strait. The group also directly struck targets in Saudi Arabia, a U.S. ally, beginning in July, and is threatening more strikes, according to Houthi spokesman Yahya Saree. The United Nations Security Council is warning of the likelihood of a humanitarian crisis.

When asked by a reporter at Wednesday's press conference how incremental rate hikes will help when geopolitical events do not show signs of improvement, Warsh said the Fed "cannot affect any individual price, whether it be oil prices, whether it be foodstuffs at the grocery store."

"But what we can do and will do is ensure that any change in relative prices don't broaden out, don't have second and third order effects on the economy. That's what we're tasked to do, and that's what we will do," Warsh said.

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