Fed Breaks Three-Year Pause, Raises Rates a Quarter Point as Inflation Refuses to Cool

The Federal Reserve moved off the sidelines on Wednesday, raising its benchmark lending rate for the first time since 2023 as policymakers grow increasingly uneasy about inflation that won’t budge, much of it tied to climbing energy costs.

By a unanimous 12-0 vote, the central bank’s rate-setting committee lifted the federal funds rate a quarter percentage point, moving it from the 3.5% to 3.75% band to a new range of 3.75% to 4%. The move ends a streak of five consecutive meetings this year in which the Fed held rates steady, and it’s the first hike the institution has made in roughly three years. Kiplinger tracked the buildup to the meeting, noting it was widely expected given elevated energy prices and a steady labor market.

In its official statement, the Federal Open Market Committee described an economy that’s holding up well despite some external pressures: growth is running at a “solid pace,” domestic spending has proven resilient even as geopolitical uncertainty lingers, and both productivity gains and business investment remain strong. The committee also noted that hiring has kept up with labor force growth and joblessness has been largely flat. Inflation, however, remains “elevated,” language the Fed used to justify Wednesday’s move as a step toward getting price growth back to its 2% goal sooner rather than later.

Warsh Frames the Hike as Inflation-Focused

At a press conference following the announcement, Fed Chair Kevin Warsh tied the decision to the central bank’s twin goals of stable prices and maximum employment, telling reporters the Fed “will deliver price stability.”

Warsh characterized the broader economy as gaining strength, pointing to labor data, private-sector income and capital spending as supporting evidence. “I would be hard-pressed to describe broad financial conditions as restrictive,” he said.

On employment specifically, Warsh noted the jobless rate sits near 4.1%, with both job openings and average hours worked trending upward, signs, he said, that the labor half of the Fed’s mandate is “in good shape.” Inflation is a different story, in his telling: it’s been above target for more than five years, and this summer’s readings haven’t changed his read on the underlying trend. “The plain fact is that inflation is too high and has been for too long,” Warsh said.

The Inflation Numbers Behind the Decision

Warsh pointed to August’s likely reading on the Fed’s favored inflation gauge, the personal consumption expenditures index, landing around 3.6%, well north of the Fed’s 2% benchmark. He added that core PCE and core CPI were tracking near 3.2% and 2.4%, respectively.

“We at the Fed are unwavering in our vital and straightforward purpose, full employment and price stability, and a thriving American economy that sets the standard for the world,” he said.

Asked by a reporter whether the Fed was simply following market expectations, which had priced in roughly a 90% probability of a hike heading into the meeting, Warsh pushed back gently, saying markets sometimes “try to prejudge” the Fed’s calls, but that Wednesday’s decision was the committee’s own.

Pressed on what changed since the Fed’s last meeting seven weeks earlier, when it held rates steady, Warsh cited three factors: a strengthening labor market, inflation trends that haven’t shown real improvement, and geopolitical instability. “There’s no hiding from hot spots around the world,” he said. Warsh had previewed much of this reasoning weeks earlier; the AP covered his Jackson Hole speech in late August, which put pressure on the Fed to act at this meeting if inflation didn’t improve.

Treasury Yields Also on the Agenda

Reporters also asked about the recent run-up in long-term Treasury yields, with the 10-year note trading near 5%, its highest level since 2023. Warsh called the causes “overdetermined,” pointing to three overlapping forces: broader economic strength, fierce competition for capital (including heavy borrowing by so-called hyperscaler tech firms funding data-center buildouts), and geopolitical tension affecting everything from energy to agricultural commodities and the price spreads tied to them.

More Hikes Likely on the Way

Alongside the rate decision, the Fed released its quarterly economic projections. The median policymaker now expects one additional quarter-point hike before year’s end, with two more FOMC meetings scheduled, October and December, where further action could occur. The median forecast also has rates holding roughly steady through next year. This marks a significant shift from earlier in the year; as Reuters reported via Wealth Professional after Warsh’s June debut meeting, only nine of nineteen officials had penciled in a hike at that point, up from none in March.

Market strategists reacted with similar takes. Kay Haigh of Goldman Sachs Asset Management said the Fed’s projections suggest no appetite for an aggressive string of hikes, predicting the committee skips October, given its closeness to the midterm elections, and delivers one more increase in December, contingent on upcoming inflation data and energy prices.

Seema Shah of Principal Asset Management framed Wednesday’s move as the opening of a new tightening cycle, arguing the unanimous vote shows even the Fed’s typically dovish members were persuaded by persistent inflation and rising energy costs. She said the debate has now shifted from whether more hikes are coming to how many.

What Comes Next

The Fed’s next meeting is set for October 27-28. According to the CME FedWatch tool, traders currently see roughly even odds, 49% versus 51%, between the Fed holding steady or hiking again by a quarter point.

Looking further out to the December 8 to 9 meeting, the same tool shows about a 49.5% probability that rates will be a quarter point higher than today’s level, a 38.2% chance of a second consecutive hike (which would push the range to 4.25% to 4.5%), and roughly a 12.3% chance the Fed holds pat through both remaining meetings. The Motley Fool has also been tracking Warsh’s public signals closely, noting his preference for a more hands-off communication style compared to past Fed chairs.

Market Reaction

Equities pulled back after the announcement. The S&P 500 slipped about 0.5%, the Dow Jones Industrial Average dropped 1.3% in afternoon trading, and the Nasdaq Composite was roughly flat, edging down just 0.08%.

Summary

The Fed raised interest rates 25 basis points on a unanimous 12-0 vote, its first hike since 2023, lifting the federal funds rate to a 3.75% to 4% range after five straight meetings on hold. Chair Kevin Warsh pointed to persistently elevated inflation (PCE near 3.6%, core PCE at 3.2%, core CPI at 2.4%) alongside a resilient labor market (4.1% unemployment) as the drivers behind the move, while also citing geopolitical tension and rising 10-year Treasury yields (near 5%) as contributing factors.

The Fed’s own projections point to one more quarter-point hike before year-end, with meetings scheduled for October 27 to 28 and December 8 to 9; market pricing via CME FedWatch shows roughly even odds on an October move and higher odds of at least one more hike by December. Stocks fell on the news, with the Dow down 1.3%, the S&P 500 off 0.5%, and the Nasdaq nearly flat.