The decision was as feared as it was expected. The American Federal Reserve announced this Wednesday, September 16, an increase in its key rates by a quarter of a point, bringing them to a range of 3.75% to 4%. This is the first increase decided by the institution since the summer of 2023, while inflation remains high. This reached 3.4% year-on-year in August in the United States, notably due to the surge in energy prices in a context of tensions in the Middle East.
The White House deplored an “unfortunate” decision, while Donald Trump has been calling for several months, against the course of inflation, for a rate cut. “The Federal Reserve's rather unfortunate decision to raise interest rates today is not based, in the government's view, on particularly compelling economic reasoning,” one of its spokespersons, Kush Desai, said on Fox News.
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The Federal Reserve estimates that another increase in interest rates will likely be necessary by the end of the year to combat inflation. This is visible in the updated forecasts of American monetary officials. According to a median of their projections, they think that key rates will settle between 4% and 4.25% at the end of the year, a notch higher than the level announced on Wednesday.
For the Fed, no progress will be made in terms of inflation between now and then, with the PCE index still increasing by 3.7% over one year. Conversely, they raised their forecasts regarding unemployment, which should remain limited to 4.1% at the end of 2026, and growth (+2.3% in the last quarter compared to +2.2% in their June estimate).
During a press conference organized this Wednesday in Washington, the president of the American central bank (Fed) Kevin Warsh estimated that inflation was “too high, for too long”, thus justifying the institution's decision to raise its key rate. “Inflation risks are increasing,” said the official, “while (those linked to the) labor market are balanced,” which authorizes the Fed to focus, for the moment, on accelerating prices.
Likewise, Kevin Warsh assured that the American central bank had decided alone to raise its key rate, without taking into account the influence of the financial markets. “It was our decision,” he said, based on the Fed’s assessment of “the trajectory of employment” and “the strength of the economy.”
Also read Interest rates are soaring: how did global debt markets lose their bearings?
Political pressures
Kevin Warsh was appointed by Donald Trump, who has never hidden his expectation of lower rates to stimulate growth. The head of state notably led an unprecedented pressure campaign against his predecessor, Jerome Powell, whom he himself had appointed during his first term. Regarding the independence of the institution he chairs, Kevin Warsh declared this Wednesday that the Fed must remain “in its lane” and not interfere with the executive, in response to a question on Donald Trump's trade policy. “Independence goes both ways” and “we let those who decide on trade and budgetary policy also stay in their lane,” he explained.
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For investors, inflation left Kevin Warsh with little choice but to disappoint the tenant of the White House. An increase in rates aims to cool the economy somewhat: it is more expensive to take on debt and invest, while demand for certain goods and services calms down. This will not solve the pressures linked to the energy crisis in the Gulf, triggered by the war in the Middle East, but will in theory prevent other sectors from overheating. “It’s a difficult decision to make. (...) It is neither painless nor a magic wand,” Claudia Sahm, economist for the investment firm New Century Advisors, told AFP before the announcement.
The pressured purchasing power of Americans is at the heart of the campaign for the next national elections (the “midterms”), in early November in the United States. The president's economic advisor Kevin Hassett issued a form of warning on Sunday, deeming it "important that the Fed does not touch anything before an election in order to preserve its independence." “President Trump and I believe there is currently no reason to raise rates,” he also said.
The White House has repeatedly suggested in recent weeks that the Fed's monetary committee is populated by "unpatriotic" elements who may seek to force Kevin Warsh's hand. Before taking the helm, Kevin Warsh sharply criticized the Fed's management of the high inflation following the Covid-19 pandemic.
