The US Federal Reserve has raised interest rates for the first time in more than three years on the back of rising inflation pressures and consumer dissatisfaction.
Wednesday’s unanimous decision, supported by all 12 members of the Federal Open Market Committee (FOMC), raised interest rates by a quarter of a percentage point and underscored the central bank’s commitment to lowering prices.
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The Fed’s benchmark interest rate is currently set between 3.75% and 4%.
“The plain fact is that inflation is too high and has been there for too long,” Federal Reserve Chairman Kevin Warsh told reporters.
Here’s what you need to know:
Why did this happen?
The US Federal Reserve has a dual mission to maximize employment, maintain price stability, and maintain its 2% inflation target.
After years of rising inflation amid the COVID-19 pandemic, inflation has finally begun to taper back toward target. However, it has been on the rise again in recent years, reaching 3.4% last month.
This comes against the backdrop of President Donald Trump’s tariffs on most trading partners, as well as the US war on Iran and increased spending on artificial intelligence.
The Fed said Wednesday’s rate hike “will support a timely return to the Committee’s 2% goal.”
What impact does this have?
There are many possible economic and political implications for raising interest rates.
The increase will hurt U.S. consumers who pay interest on credit card debt. It will also be even more expensive for people who want to borrow for homes, cars and other big-ticket purchases.
If the Fed raises borrowing costs, it could also reduce demand for goods, impacting U.S. businesses and threatening the health of the economy.
The rate hike also comes at an inopportune time for President Trump and the Republican Party, with less than 50 days left until the November midterm elections that will determine whether Republicans or Democrats control Congress.
U.S. consumers have faced rising prices for years, with the average price of a gallon of gasoline recently hitting $4.36 ($1.15 per liter), up 14 cents in the past week and up from $3.18 a year ago, according to the American Automobile Association (AAA). Voters can choose to air their grievances at the polls, giving Democrats a chance to win one or both chambers.
How quickly will this lead to price increases?
U.S. banks looking to borrow money from the Fed will immediately start paying higher lending rates.
Consumers with credit cards typically have variable interest rates that are close to the prime rate that banks charge their customers, and like homeowners with adjustable-rate mortgages, their minimum payments can increase within a month.
What did Trump say?
The decision is a blow to Mr. Trump, who has frequently clashed with the Fed over lowering borrowing costs. President Trump launched a pressure campaign citing resistance from former Federal Reserve Chairman Jerome Powell.
When Powell’s term ended earlier this year, Trump handpicked his successor, Kevin Warsh, who took the job in May.
At the time, President Trump said he would choose someone who supports low interest rates.
On Sunday, during a visit to Ireland, President Trump said the United States “should pay the lowest interest rates in the world” after threatening to cut off large swaths of U.S. trade unless interest rates were lowered.
Mr. Warsh was asked on Wednesday what his message to President Trump was about raising interest rates.
“Nothing about discussions with the president,” he replied.
Approximately three hours after the interest rate decision was announced, President Trump lashed out.
“Interest rates in the US should be below 1%, because we have the best credit in the world,” he said on his Truth Social platform. “We have almost every country in the world on our backs, and we can’t go on any longer. Lower U.S. interest rates, and fast!”
Federal Reserve members said Wednesday that another quarter-point rate hike is likely this year and that rates will remain on hold until 2027.
