The Federal Reserve on Wednesday raised interest rates for the first time in three years, attempting to control inflation with a move that defied President Trump’s wishes and clashed with his upbeat economic message to midterm voters.
The Federal Open Market Committee voted unanimously for a 0.25-percentage-point increase in its benchmark rate, raising it to 3.75%-4.0%.
The move will anger Mr. Trump, who recently threatened to cut off trade with some countries if the Fed refused to lower rates.
But Mr. Trump’s hand-picked chairman, Kevin Warsh, and other central bankers felt they had no choice after a series of inflation readings came in hotter than they would have liked.
Mr. Warsh said the economy appears to be strengthening overall, but he said inflation “remains elevated” and that geopolitical developments — an allusion to the Iran war — forced the Fed to focus on the price side of its mandate.
“Today’s policy action will support a timelier return to the committee’s 2% goal. This committee will deliver price stability,” he said.
“The least well-off,” he said, “are the ones that have the most to gain from stable prices.”
The stock market, which had been in positive territory for most of the day, nosedived after the Fed’s decision and its indication that another rate hike is likely later this year.
The Fed raises rates when inflation is high as a way to slow the economy and reduce demand for goods and services, resulting in more stable prices.
The central bank’s benchmark rate has a trickle-down impact on interest rates for personal and business loans and investments.
Mr. Trump appointed Mr. Warsh to replace the last chair, Jerome Powell, with an eye toward lower rates, making this Fed decision a momentous one.
Mr. Warsh is caught between Mr. Trump’s wishes and an annual inflation rate that remains well above the Fed’s target of 2%.
The Consumer Price Index, a leading measure of what American consumers pay for common goods and services, rose 3.4% for the year ending in August, the government reported Friday.
Mr. Trump says the economy’s fundamentals and job picture remain strong and Americans deserve more favorable borrowing terms through lower interest rates.
He says slashing rates will unleash economic growth.
“When our business is good, we should lower interest rates. You want to build America? You are going to see building like you’ve never seen [when rates drop],” Mr. Trump told reporters in August.
Mr. Warsh pledged to deliver price stability, however, and the Fed decided it could no longer stand pat. Because the vote was unanimous, it undercuts Mr. Trump’s claim that Mr. Warsh was hamstrung by holdover Democratic appointees on the Fed committee.
Beyond economic strategy, the Fed’s decision is a political blow to Mr. Trump because it suggests a segment of the economy needs a course correction nearly halfway through his term.
For months, Mr. Trump has touted a “Golden Age” of America through foreign investments in American jobs and a trade agenda that tilts the playing field back toward U.S. workers.
He says the GOP delivered tax relief with its “One Big Beautiful Bill,” putting money back in people’s pockets despite Democrats’ critiques over inflation and the high cost of living.
“More Americans are working in the United States right now than at any moment in the history of our country,” Mr. Trump told a Las Vegas crowd on Aug. 5. “The economy is the greatest economy by far.”
Mr. Trump campaigned in 2024 on a promise to lower prices after a post-pandemic period of rampant inflation under President Joseph R. Biden.
Inflation came down from a 40-year high of over 9% to about 3% by January 2025. It has ranged from 2.3% to 4.2% in Mr. Trump’s second term.
While the Fed cut rates three times last year, it is now reversing its steps.
During his press conference, Mr. Warsh stressed the upsides of the economy, including relatively low unemployment, and said inflation has been a problem for at least five years.
“The plain fact is that inflation is too high and has been for too long,” Mr. Warsh said.
Currently, energy prices from the Iran war are a key driver of inflation. Oil prices have risen above $100 per barrel and diesel fuel hit an all-time high of $6.31 on Wednesday, an expense that will raise transport and freight costs and filter through the economy.
“Some American stores have started to ration motor oil — that’s how desperate the situation has become. And when the price of gas goes up, so does the price of everything else,” Senate Minority Leader Charles E. Schumer, New York Democrat, said Wednesday.
Rate changes often come in bunches, and Fed members signaled another rate hike is likely this year.
It might decline to do that at its upcoming October meeting, right before the elections, meaning a December increase is possible.
Some economists say responsibility for stable prices extends beyond the central bank.
Ryan Young, a senior economist at the Competitive Enterprise Institute, said ending the Iran war would eventually bring down energy prices, while ending the trade war with Canada would ease cost pressures from tariffs on key industrial sectors.
“The answer is not necessarily in the Fed’s hands,” he said. “Upcoming policy choices on Iran, Canada, and tariffs will play a large role.”
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