Fed hikes rates as US inflation persists

The 25-basis-point increase comes despite the US president’s repeated demands for lower borrowing costs The US Federal Reserve has raised interest rates despite US President Donald Trump’s repeated demands for lower borrowing costs, as stubborn inflation continues to weigh on the world’s largest economy.

The Fed hiked its benchmark rate by 25 basis points to 3.75%-4% on Wednesday, marking the first increase since 2023 and the first policy change under Chairman Kevin Warsh.

The move had been widely expected.

Some 85% of economists surveyed by Reuters after the latest inflation data had forecast a quarter-point increase, while a narrow majority expected at least one more hike by the end of March 2027.

The decision comes after inflation showed renewed signs of pressure.

US consumer prices rose 3.4% year-on-year in August and 0.4% from the previous month, with gasoline prices jumping 3.9%, according to the US Bureau of Labor Statistics.

Price pressures have been fueled in part by higher energy costs linked to the Iran war, while tariffs have also added to inflation concerns.

Higher interest rates are intended to slow price growth by making borrowing more expensive, which tends to reduce spending by consumers and businesses.

The Fed has a long-term inflation target of 2%.

Warsh said last month that the goal was “firm” and “fixed,” arguing that inflation remained too high and that the central banking system’s main focus should be on prices.

The labor market has remained relatively stable, with unemployment at 4.1% in August and employers adding 162,000 jobs.

Growth has slowed, however, with GDP expanding at an annualized rate of 1.5% in the second quarter, down from 2.1% in the first.

Read more Trouble brewing in global bond markets: What to know The rate increase could make borrowing more expensive for US households already facing higher prices, according to Yung-Shin Kung, chief investment officer at Mast Investments.

He said that lower-income consumers could be hit particularly hard, as they face both elevated prices for essentials such as food and housing and higher costs for servicing debt.