The Federal Reserve raised its benchmark interest rate Wednesday for the first time since 2023 in an effort to quell stubbornly high inflation, a move that could spur a sharp response from the White House.
The quarter-point increase lifts the Fed’s key rate to about 3.9% and, over time, could result in higher borrowing costs for mortgages, auto loans and credit cards. In a set of quarterly projections, the Fed also signaled that its rate-setting committee expects to hike rates a second time later this year to 4.1%.
“Today’s policy action will support a timelier return” to the central bank’s 2% inflation goal, the Fed said in a statement.
The move comes as Americans are already struggling with high costs for groceries, gas and housing. Affordability has taken on a leading role in the upcoming midterm elections, just seven weeks away.
In a press conference following the Fed’s announcement, Fed Chair Kevin Warsh said that while the job market remains resilient, inflation has stubbornly remained above the Fed’s 2% target for years.
“The plain fact is that inflation is too high and has been for too long,” Warsh said.
Since taking the lead at the Fed in May, Warsh has said the Fed is firmly committed to taming inflation, and policymakers would take their cues from the data to determine if inflation was going in the right direction.
“We must be confident that underlying inflation is moving to our objective clearly and at sufficient speed. Today the FOMC decided that this standard has not been satisfied,” Warsh said, referring to the policy-setting Federal Open Market Committee.
The rate hike marks a turnaround for Warsh, who often suggested last year that the Fed could reduce its key rate, echoing President Donald Trump’s call for lower borrowing costs.
Yet the ongoing disruptions from the Iran war, which have pushed up average gas prices more than 7% from just a month ago, threaten to spread through the economy and keep broader inflation stubbornly high. An inflation report last week showed core prices, which exclude food and energy, accelerated a bit in August.
According to the Fed’s preferred measure, inflation was 3.7% in July compared with a year ago, up from 2.3% in April 2025, just before Trump unveiled sweeping tariffs. Core inflation, which excludes the volatile food and energy categories, was 3.3% in July, the latest data available, up from 3% just before the Iran war and far above the Fed’s target.
Earlier Wednesday, the government said retail sales jumped 1.2% in August from the previous month, a sign that consumers are still spending at healthy levels despite sentiment surveys indicating Americans remain gloomy about the economy. Strong spending is a sign that interest rates at current levels aren’t necessarily restricting the economy and cooling inflation.
“While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient,” the Fed said, a likely reference to ongoing consumer spending and strong investment in AI data centers by large technology companies.
Higher inflation isn’t all about gas prices. Ongoing investment in AI has driven up prices for computer chips and other electronic gear, adding to overall inflation. Tariffs may still be elevating some costs, such as appliances, which jumped in price last month.
Trump harshly criticized Warsh’s predecessor, Jerome Powell, for not cutting rates quickly enough. The Justice Department even launched a criminal investigation into Powell over brief testimony he delivered to Congress last year, though that probe was eventually dropped.
When asked Wednesday how Trump might react to the rate increase, Warsh said, “I’ve got nothing for you on a discussion with the president.”
Kevin Hassett, Trump’s top economic adviser, was asked in an interview with Fox News on Sunday how Trump might react to a rate hike.
“I’m sure he’s not going to be super happy about it, but he will defend the independence of Kevin Warsh above all,” Hassett said.
Warsh might also have a measure of protection because his father-in-law is Ronald Lauder, a friend of Trump’s and a billionaire donor to his campaigns.
In the Fed’s economic projections issued along with the rate decision, officials indicated they are likely to raise the key rate once more this year. Analysts doubt that will be at the next meeting in October.
“Most FOMC members see a total of two hikes this year per the [projections], and it will likely skip October’s meeting given its proximity to the midterm elections,” Kay Haigh, of Goldman Sachs, said.
For their part, Wall Street investors have forecast three hikes for the Fed, with additional increases in December and March.