The Federal Reserve raised interest rates on Wednesday for the first time since 2023 in an attempt to tamp down high inflation that’s heated up with the Iran war.
The Federal Open Market Committee voted 12-0 to hike rates to 3.75% to 4%, an increase of a quarter percentage point. Monetary policymakers cited solid economic and productivity growth, as well as job gains, in their announcement.
“While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient,” the statement read. “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.”
Fed Chair Kevin Warsh told reporters the geopolitical situation has changed over the last seven weeks since the Fed’s previous interest rate decision.
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“The decision we made today was a sober decision, serious decision, responsible decision, one that we have been preparing for and thinking about in my 110 or 20 days here,” Warsh told reporters after the announcement.
“There’s no hiding from hot spots around the world, and our judgment about what is the most likely or least likely of the geopolitical situation has changed,” Warsh said.
The vote was one of Warsh’s greatest tests yet, as month-to-month inflation worsened and overwhelmed workers’ wage gains. President Donald Trump selected Warsh after publicly pressuring the previous Fed chair, Jerome Powell, to slash rates and insisting his new pick should do the same.
Trump doubled down on lowering rates as recently as Sunday.
“We should be paying the lowest interest rate in the world, regardless of their formulas,” Trump told reporters at the Irish Open golf tournament on Sunday.
The committee had punted the decision to change rates in every meeting since January, choosing instead to keep rates steady in part because the future of the Iran war remained unclear. But the Trump administration’s promises that the war would come to a quick end and energy prices would plummet have not come to bear. Economists’ expectations that the Fed would eventually raise rates soared.
Half of the members of the rate-setting committee — which includes the Fed’s seven board governors, the president of the Federal Reserve Bank of New York, and four rotating members from the Reserve Bank presidents — indicated in the committee’s June projections that they expected interest rates to rise this year. Warsh, a fierce critic of the Fed signaling its future moves to eager markets, sat out of that quarterly projection.
The Fed’s decision to raise interest rates will likely increase rates for mortgages, credit cards and auto loans. High rates also make borrowing money more expensive for businesses, increasing the likelihood of higher unemployment for the sake of limiting inflation.
Persistent inflation has long been a problem for the central bank, consistently topping the Fed’s 2% target inflation rate since the U.S. economy began climbing out of its pandemic slump.
The annual inflation rate in August came in at 3.4%, and month-to-month inflation increased 0.4% from July, according to a report released by the Bureau of Labor Statistics on Friday. Inflation has increased every month since May 2020, with the exception of a dip in June after the U.S. and Iran announced a short-lived ceasefire.
The Congressional Budget Office estimated that increased energy prices from the Iran war added a significant share to the inflation rate in the second quarter of 2026, according to a report released Tuesday. The CBO projects that energy prices will continue to add to inflation in the first months of 2027.
Investor anxiety over where the economy is headed has also manifested in the bond market. Yields — or the return on investment — for 10-year and 30-year U.S. Treasury notes hit their highest rates in decades in the last month. Treasury Secretary Scott Bessent has announced up to $6 billion in buyback purchases of government bonds, but the initiative has failed to rein in high yields.
Warsh on Wednesday attributed the bond yield rises to the U.S. economy’s “strength,” companies’ competition for capital and geopolitics.
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