With Inflation Elevated, Federal Reserve Hikes Interest Rates

Key Takeaways

• In a unanimous decision, the Fed raised its key federal-funds rate target range by a quarter point to 3.75% to 4.00%.
• Inflation has remained above the Fed’s target for more than five years, and in recent months has crept higher, thanks to rising oil prices stemming from the war in Iran.
• On a rate-setting committee that has been characterized by deep divisions for more than a year, all members agreed to raise rates.

The Federal Reserve raised interest rates at its September meeting on Wednesday, citing stubbornly high inflation. It’s the first rate hike since 2023, and comes just three meetings into Kevin Warsh’s term as Fed chair.

“Today’s policy action will support a timelier return to the Committee’s 2% goal,” the Federal Reserve Open Market Committee wrote in its statement. It was a unanimous decision by the committee.

Inflationary pressures appear to be the top priority for policymakers, with the expanding conflict in the Middle East driving up energy costs and the artificial intelligence boom raising costs elsewhere in the economy.

“The plain fact is that inflation is too high and has been for too long,” Warsh said in his post-meeting press conference Wednesday.

“Policymakers remained as patient as they could and held off hiking rates as long as possible, but economic conditions have forced their hand,” says Dominic Pappalardo, chief multi-asset strategist for Morningstar Wealth. “Treasury bond yields have moved substantially higher this year despite the Fed remaining on hold, signaling market participants thought a hike was inevitable.”

“The Fed rarely hikes rates only once, so now the conversation among prognosticators will quickly shift to how many hikes we may see during this new cycle,” Pappalardo adds.

The “dot plot,” which summarizes committee members’ forecasts for the path of interest rates, inflation and the labor market, showed that most members expect to see two rate hikes total for 2026. That would bring the fed-funds target to a range between 4.000% and 4.25% by the end of December.