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WASHINGTON -- The Federal Reserve raised its benchmark interest rate Wednesday for the first time since 2023 in an effort to quell stubbornly high inflation and the central bank also signaled that another rate hike could occur later this year.
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 could hike rates a second time to 4.1%.
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, Chair Kevin Warsh emphasized that the economy has shown signs of gathering speed since the central bank decided to keep rates unchanged in late July. Inflation has also remained stubbornly above the Fed's 2% target, and he noted that there is little sign it is cooling.
"The plain fact is that inflation is too high and has been for too long," Warsh said. "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," he added, referring to the policy-setting Federal Open Market Committee, an arm of the Fed.
"Warsh's tough talk around inflation in the post-meeting press conference suggested that he may be pushing for higher rates in meetings to come," said Preston Caldwell, chief U.S. economist at Morningstar.
Warsh also said renewed combat between the U.S. and Iran, which has driven up gas prices, had convinced Fed officials to support rate hikes.
"There's no hiding from hot spots around the world," he said.
Warsh noted that other central banks are hiking interest rates in response to global turmoil and higher gas prices. The European Central Bank raised its key rate last week, and the Bank of Japan is expected to do the same Sept. 18.
The Fed next meets in late October and most economists expect officials will keep rates unchanged then because it is just a week before the midterm elections.
But Wall Street analysts now see a rate hike by December as a near certainty, according to futures prices.
Also late Wednesday, the yield, or interest rate, on the 2-year Treasury rose to 4.74% from 4.67%, another sign investors expect the Fed to potentially lift rates further. Still, if inflation does show signs of cooling in the coming months, that could change.
Since taking the lead at the Fed in May, Warsh has said it is firmly committed to taming inflation, and that policymakers would take their cues from the data to determine if inflation was going in the right direction.
The rate hike marks a turnaround for Warsh, who was appointed by President Donald Trump. Warsh often suggested last year when under consideration by Trump that the Fed could reduce its key rate, echoing the president's call for lower borrowing costs.
And in April, when Warsh's nomination was under consideration by the Senate Banking Committee, Trump said in a television interview that he would be disappointed if Warsh didn't cut rates. On the same day, however, Warsh told the committee he did not promise Trump he would cut rates and said he would be "an independent actor" as Fed chair.
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 in August.