The Fed raises interest rates for the first time since July 2023

Washington (CNN) — The Federal Reserve on Wednesday raised interest rates for the first time in more than three years in a renewed fight against inflation, which has picked up since early in the year due to the war with Iran.

Officials voted to raise their benchmark lending rate by a quarter point to a range of 3.75-4%, undoing one of last year’s three rate cuts.

All of the Fed’s policymakers were on board with Wednesday’s decision, including Chairman Kevin Warsh himself, underscoring the concerns with inflation, which has been elevated for the last five years. A resilient labor market is also allowing the Fed to focus on inflation.

“Today’s policy action will support a timelier return to the Committee’s 2 percent goal,” official wrote in their latest policy statement.

In their latest economic projections, officials penciled in another rate hike by year’s end, similar to Wall Street’s forecast. Warsh again did not submit projections at this meeting, part of his refusal to offer forward guidance, or estimates on the trajectory of interest rates.

The Fed’s latest decision comes after months of a disruptive war in the Middle East that has roiled energy prices and threatens to make inflation more persistent and widespread. The Fed’s preferred inflation gauge for August is due later this month, but an estimate from the Cleveland Fed shows that it likely moved higher from August through early September. Officials are also worried about the potential inflationary impact of the massive AI buildout, which some have described as a serious risk.

Wednesday’s decision marks the first big move on interest rates under Warsh, who has repeatedly stated he is acting independently as the Fed’s leader. The rate hike could put him at odds with President Donald Trump, who appointed him after repeatedly pressuring the central bank to lower rates.

National Economic Council Director Kevin Hassett told CNN’s Jake Tapper on Wednesday that the president will accept the Fed’s latest rate hike.

Still, the president hasn’t stopped demanding rate cuts, and earlier this month, he even threatened to cut off trade with several countries if the Fed doesn’t lower rates. Trump hasn’t attacked Warsh, and has instead criticized the Fed’s influential Board of Governors as “hostile.” The Fed’s rate decisions aren’t made by the board itself, but rather by a broader group at the central bank that includes the board.

The greater problem

The Fed now has a top priority: Inflation.

That became clear after the latest Consumer Price Index for August showed that inflation accelerated that month, particularly a sub-measure that strips out volatile food and energy prices. Fed officials had thought any inflation stemming from the Iran war would be temporary, but the conflict has persisted for seven months now, which has raised the chances of so-called second-round effects, or prices that increase after an initial energy shock, such as airfares and freight costs. Fed officials have also identified AI-driven inflation as another looming threat to the Fed’s price stability mandate.

The Fed’s pivot to rate hikes also implies central bankers believe the labor market is in a position to withstand tighter monetary policy. In addition to fighting inflation, the Fed is also responsible for keeping the labor market intact, but it’s never guaranteed the Fed won’t inadvertently tilt the economy into a recession whenever it raises rates. In the past, Fed chairs have willingly forced the economy into a recession if it meant getting inflation back under control.

For now, the economy seems to be in good shape. Job growth picked up sharply in August, according to the Bureau of Labor Statistics, while the unemployment rate held steady at a relatively low 4.1%. Economic growth has also been on solid footing, though an increasing share of it has been driven by red-hot spending on AI — some of which is now being propelled by credit. And new data on Wednesday showed that Americans stepped up their retail spending sharply last month, showing the Fed indeed has some room to raise rates.

But how far is Warsh prepared to go? Officials’ latest estimates show they plan to hike only once more and that’s it. But that may not be enough to slow down red-hot AI demand. Investors will be looking for any signal from the chairman that an aggressive rate-hiking cycle is on the horizon. In a major speech last month, Warsh only said that there’s more “work to do” in fighting inflation.

The bond market, meanwhile, has already started doing some of the Fed’s work for it, making borrowing more expensive even before any rate hike. The yield on the 10-year US Treasury, a key benchmark for borrowing costs, rose above 5% on Tuesday, its highest closing level since 2007. That’s putting pressure on households and businesses.

This story is developing and will be updated.

The-CNN-Wire
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