Federal Reserve raises interest rates by 25 basis points to combat inflation

The US Federal Reserve has raised interest rates in the world's largest economy by 25 basis points to tackle stubbornly high inflation, a move sure to anger President Donald Trump, who has demanded lower rates.

The Fed's Federal Open Market Committee voted unanimously on Wednesday, local time, to raise rates to between 3.75 and 4.00 per cent, citing "elevated" inflation and adding that the rate hike would support a "timelier return" to its 2 per cent target for the metric.

A majority of Fed policymakers expect at least one more rate hike to be necessary before the end of the year, according to the central bank's Summary of Economic Projections, also published Wednesday.

Fed Chair Kevin Warsh was set to address a press conference following the announcement.

The US economy has been dealing with years of higher-than-target inflation, and prices have surged in the wake of Mr Trump's war on Iran, his signature tariff policies and the ongoing AI boom.

The Fed has held rates steady since January, choosing to wait to gauge the effects of energy price shocks and to let the impact of tariffs on prices ripple through the economy.

At its last meeting in July, however, a quarter of the committee's voting members dissented from the decision to hold pat, calling for an immediate hike.

Since then, other policymakers — including Mr Warsh — have hinted that if inflation did not meaningfully slow, the Fed may need to intervene.

On Friday, August's consumer price index came in at 3.4 per cent — unchanged from the month before, but still well above the Fed's long-term 2 per cent target.

The Summary of Economic Projections (SEP) raised its forecast for its preferred gauge of inflation — the Personal Consumption Expenditures (PCE) price index — by 0.1 percentage points to 3.7 per cent by year-end.

Inflation "has spread across the economy and is becoming embedded in consumer and firm behavior — exactly what the Fed must prevent," said Diane Swonk, chief economist at KPMG, in a note before the Fed's decision was announced.

The Fed also raised its projection for GDP growth by year-end to 2.3 per cent, up 0.1 percentage point.

Political implications

The Fed last raised rates in 2023, when the central bank was still battling post-pandemic inflation.

The fresh hike will be sure to anger Mr Trump, who has launched an unprecedented campaign to pressure the independent central bank to lower rates in order to spur economic activity.

The Trump administration launched a criminal probe against Mr Warsh's predecessor Jerome Powell — whom the president regularly insulted and berated — and is still trying to fire Fed Governor Lisa Cook.

On Tuesday, key Trump economic advisor Kevin Hassett advocated against a rate hike but said the White House would "understand and respect the decision".

Mr Warsh was named to his position after a contentious Senate confirmation process, where Democratic lawmakers accused him of being a "sock puppet" for Mr Trump, which he denied.

So far, Mr Trump has supported Mr Warsh, claiming that the Fed chair wants lower rates and accusing the board of being "political".

The Fed has a dual mandate to deliver maximum employment while keeping inflation to its long-term 2 per cent target.

It mainly achieves these goals by setting the key US interest rate — lower rates tend to spur economic activity but fuel inflation, and hiking them cools both activity and prices.

The Fed's SEP showed that at least 12 of 18 policymakers who participated in the projection expected one more rate hike would be required before the end of the year.

Four policymakers expect two more rate hikes to be required.

Mr Warsh has criticised the Fed's policy of offering such projections in the past and did not participate in the previous iteration in June.

This projection also included only 18 policymakers, suggesting he had once again withheld his contribution.