US raises interest rate for first time in 3 years
What's the story
The US Federal Reserve has raised its key interest rate by 25 basis points, the first hike in over three years. The decision was taken unanimously by the central bank's Federal Open Market Committee (FOMC), which voted 12-0 to raise the overnight funds rate to a target range of 3.75%-4%. The move is aimed at curbing inflation driven by rising oil prices and other factors.
Inflation concerns
Inflation remains elevated, says FOMC
In a post-meeting statement, the FOMC acknowledged that "inflation remains elevated." It added that the latest rate hike would help achieve the committee's 2% inflation target.
During a news conference, Fed Chairman Kevin Warsh admitted that inflation has been "too high... for too long."
He stressed the need for confidence in underlying inflation moving toward their objective clearly and at sufficient speed.
Decision factors
Middle East tensions contributed to rate hike decision
Warsh noted that recent economic reports showed a robust economy, including a strong labor market. However, inflation remained above the central bank's target.
He also said that tensions in the Middle East contributed to their decision.
Despite conflicting statements from policymakers, markets had anticipated a greater than 90% chance of the FOMC approving this increase, although there were discussions about potential dissenters.
Future projections
Rate hikes expected later this year
Updated projections released by the committee on Wednesday show that a strong majority of officials expect another rate hike later this year.
The dot-plot grid of individual expectations indicated that 16 out of 18 participants expect another rate increase, with four seeing two more as possible.
However, there are no increases planned for subsequent years, with one cut each indicated for 2028 and at least one for 2029.
Inflation outlook
Fed revises inflation expectations for this year
The committee has also revised its inflation expectations for this year, projecting a headline personal consumption expenditures price index at 3.7% and core (excluding food and energy) at 3.4%.
Both are 0.1% point higher than the last update in June.
The Fed doesn't expect to hit its inflation target until 2029 but sees both measures declining sharply in 2027: to 2.3% for headline and 2.5% for core, respectively.