Fed raises key interest rate for the first time in over three years - Warsh defies Trump

It is the first interest rate hike in the US in more than three years and also the first in the term of office of Warsh, who has only been in his job since May. The Fed last turned the key interest rate in December 2025, but at that time in the opposite direction. She lowered interest rates. The central bankers justified their move on Wednesday with stubborn inflation. The Fed Board of Directors is thus following the course of the European Central Bank. She raised the key interest rate in Europe a week ago.

The decisive reason for the US Federal Reserve's decision may have been the latest inflation figures. In August, prices in the USA rose by 3.4 percent compared to the previous year, it was announced last week. Gasoline and energy prices in particular are fueling inflation. After this announcement, it became clear that the hoped-for trend reversal was not in sight. In the first summer months, inflation only rose moderately and in some cases even fell. But that was apparently only a short-term relief.

Increase was announced

Central Bank Chairman Warsh had already raised expectations of an interest rate increase at the end of August, before the latest inflation figures were published. Speaking at the central bank meeting in Jackson Hole, Wyoming, he expressed concern about "too high" inflation and said the Fed had "work to do." Financial markets interpreted this as an announcement that the Fed would raise interest rates.

The meeting of central bankers in September was therefore considered by many observers to be the most important, landmark meeting of Fed governors this year - and a test of credibility for Warsh. Because even if the economic situation and Warsh's statements pointed to an interest rate increase, it could not be ruled out that the Fed would ultimately back down.

She didn't do that. Warsh and his colleagues have thus taken a stand against Donald Trump. The US president wants low interest rates to improve his party's prospects before the midterms in November. He nominated Warsh as Fed chief in January, not least because he hoped he would lead to a loose monetary policy. After Warsh took office, Trump refrained from making comments from the sidelines and praised the new central bank chief. Warsh was “fantastic,” Trump said in July.

But in early September, a few days after Warsh's speech in Jackson Hole, Trump changed his rhetoric. In a post on his Truth Social platform, he clearly called on the central bank to lower interest rates. The members of the Fed Board of Directors with their “great leader” must be “patriots,” Trump wrote. He combined this with a threat: He would “not allow” high interest rates to maneuver the USA into an unfair competitive situation compared to other countries.

Trump doesn't react happily

Trump reacted all the more angrily to the central bank's decision. “Interest rates in the United States should be at 1 percent or lower because we have the best credit rating in the world – BY FAR,” he wrote on his Truth Social platform. So far, he has avoided any attacks on Warsh, his “dream candidate” for Fed chairmanship. Instead, he suggested that Warsh's colleagues on the Fed board were "political" and would push through higher interest rates against the wishes of their chairman. However, the committee now made its decision unanimously. Warsh also supported her.

The question is whether the rate hike represents a change in policy by the Fed. One interest rate hike is usually quickly followed by another because central bankers decide to make monetary policy more restrictive in the long term. This is also the case in the opposite case. In 2025, for example, the Fed cut interest rates three times in a row.

This time, however, the US Federal Reserve's further course of action is not at all certain. For one thing, the next Fed meeting in October will take place just a few days before the midterms. On the other hand, Warsh is a fierce opponent of the current practice in which Fed governors predict how they believe key interest rates will develop. This so-called dot plot serves as a guide for the financial markets. After taking office, Warsh decided that he did not want to participate in the forecasts and did not make any other public statements that extended into the future.

In addition to the possible conflict with Trump, the Fed meeting was also dominated by the ongoing turmoil in the US government bond markets. The yield on US ten-year bonds temporarily rose to more than five percent on Monday. This is the highest value since 2007. For the USA, taking on debt has become more expensive than it has been in almost 20 years. US Treasury Secretary Scott Bessent tried to counteract this by buying back government bonds worth more than six billion dollars. That wasn't successful.

The most important driver for the high yields on US government bonds is the price of oil, which has recently risen sharply again. However, the US Federal Reserve's key interest rate also has an indirect impact on returns. Experience shows that both values ​​move in the same direction: higher interest rates usually mean that the yields on debt securities tend to rise even further. Another reason why Trump may not be happy with his new Fed chief Kevin Warsh for much longer.