US Fed raises rates as inflation, Middle East war weigh on US economy

The US Federal Reserve raised its benchmark interest rate by 25 basis points on Wednesday, marking its first rate increase since July 2023 as persistent inflation and higher energy costs made the oulook of the world’s largest economy uncertain.

The Federal Open Market Committee unanimously raised the federal funds target range to 3.75 percent –4 percent, reversing the easing cycle that began in 2024.

“Inflation remains elevated. Today’s policy action will support a timelier return to the Committee’s 2 percent goal,” the committee said in its statement.

The decision comes as the US economy faces renewed inflationary pressure from the ongoing US-Israel war with Iran, which has pushed up energy prices. Gasoline prices are averaging about $1 a gallon above last year’s levels, while diesel recently reached a record $6.31.

The higher rates are intended to slow consumer and business spending and prevent inflation from becoming entrenched. However, the move also raises borrowing costs for households and businesses at a time when affordability is already under pressure.

Mortgage payments, car loans, student debt and other forms of borrowing are likely to remain more expensive as the central bank seeks to contain price pressures.

Historically, when the Federal Reserve raises rates once, they usually raise them again, which signals the possibility of the Federal Reserve raising rates further.

Most officials expect the benchmark rate to increase soon and now estimate that inflation could take until around 2029 to return to the central bank’s 2 percent target.

The rate decision could put Fed Chair Kevin Warsh at a different odds with President Donald Trump, who has repeatedly said the US should have lower rates than any country in the world.

Warsh, whom Trump nominated as Fed chair, has maintained that the central bank should remain independent from the White House.

Meanwhile, inflation is increasingly weighing on US consumers. Real hourly earnings fell 0.1 percent year-on-year in August and 0.3 percent from the previous month, while consumer sentiment has also weakened and expectations for further inflation have risen.

The rate increase also comes amid pressure in the US bond market, where the 10-year Treasury yield recently reached a 19-year high. Higher government bond yields can feed into borrowing costs for consumers and businesses.