Persistent inflation and rising long-term yields have plagued Governor Warsh ahead of FOMC meeting
The United States Federal Reserve (Fed) has raised interest rates for the first time in three years, hiking its overnight rate by 25 basis points to between 3.75 and 4 per cent today.
The decision to hike was largely expected by markets, which had priced in a roughly 85 per cent chance of this, given persistent inflation in the United States and an economy that is still showing signs of strength.
"Inflation remains elevated. Today's policy action will support a timelier return to the Committee's 2 percent goal. The Committee will deliver price stability," a short press release accompanying the decision reads. A new set of interest rate projections released with the decision point to another 25 basis points before the end of 2026.
In August, annualized US CPI held at 3.4 per cent, well above the Fed's two per cent target. Much of that inflation, however, is the result of high energy prices exacerbated by conflict in the Middle East. Core CPI, which ignores food and energy costs, was more reasonable at 2.4 per cent. The personal consumption expenditures price index, which the Fed tends to prefer, was as high as 3.7 per cent in July, which drove bond markets to begin pricing in this hike.
US GDP growth and unemployment data has otherwise been relatively strong in the United States, as the release highlights.
"Economic activity is expanding at a solid pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient. Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little," the release reads.
The US President has made it clear that he wants interest rates to come down. The decision potentially sets up new Fed Chair Kevin Warsh for conflict with President Trump, who had heavily criticized Warsh's predecessor, Jerome Powell, for holding interest rates steady through 2025 and early 2026.
US bond markets have been volatile in the past week, with yields on 10-year US treasury bonds rising to their highest points since 2007, driven by expectations of a hike, ongoing inflation, and concerns about sovereign debt levels in the developed world.
