Fed hikes rates in search of ‘timelier’ drop in inflation, sees more tightening ahead

The Federal Reserve raised interest rates on Wednesday and flagged further increases in borrowing costs in coming months, with new US central bank chief Kevin Warsh joining a unanimous decision that effectively acknowledges the Trump administration’s inability so far to control inflation.

While President Donald Trump had promised to lower prices on his watch, the combined impact of his global import tariffs, an energy shock following the start of the US-Israeli war with Iran, and capital spending from the artificial intelligence boom has kept price pressures intense enough that the Fed felt it needed to raise its benchmark overnight interest rate by a quarter of a percentage point to the 3.75 percent-4.00 percent range.

New policy projections showed 16 of 18 policymakers anticipate at least one more quarter-percentage-point hike by the end of this year, with only two of them seeing rates remaining stable from here. Warsh apparently again did not submit a rate projection.

It’s the first policy shift under the new Fed chief, who took office in late May after being selected by Trump with an expectation that he would cut rates.

The dollar rose against the euro after the Fed’s announcement, while US Treasury bond yields held largely steady, having already weakened in anticipation of the hike.
After hitting a 19-year high above 5 percent on Monday, the benchmark 10-year Treasury yield was trading at 4.958 percent, compared to 4.946 percent just prior to the announcement.

The 30-year bond yield dipped to 5.312 percent after trading at 5.327 percent just before the announcement. Stocks were mostly higher, with the S&P 500 index up 0.3 percent and the Nasdaq Composite up 0.7 percent.

Market bets on a rate hike at the Fed’s next meeting in late October ticked higher to 56.5 percent from 54 percent prior to the hike, according to CME Group’s FedWatch Tool.

“The Federal Reserve’s decision today to raise interest rates by a quarter percentage point reflects its continued focus on addressing persistent inflation. While inflation has moderated from peak levels, it has remained elevated enough to prompt additional action from the Federal Open Market Committee,” said Michele Raneri, head of US research and consulting at TransUnion in Chicago.