Why the Federal Reserve raised US interest rates for the first time since 2023

The statement was three short paragraphs long. On 16 September 2026 the Federal Open Market Committee (FOMC), the body that sets interest rates at the US Federal Reserve, said it had decided “to raise the target range for the federal funds rate by 1/4 percentage point to 3-3/4 to 4 percent”. It added: “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.”

The vote was 12 to 0. It was the Fed’s first increase since 2023 and reversed one of three cuts made in 2025, according to a report in Nation Thailand. It was also the first change of any kind under Kevin Warsh, who became chair in late May.

What the Fed did

The federal funds rate is the rate at which US banks lend to each other overnight, and it influences the cost of mortgages, car loans, business credit and government borrowing in the United States and, through the dollar, far beyond it. The Fed steers it with a set of administered rates. An implementation note published alongside the statement raised the interest paid on banks’ reserve balances to 3.90% and the primary credit rate, at which the Fed lends directly to banks, to 4.0%, both from 17 September.

Minutes of the meeting, released on 7 October, listed those voting for the increase as Warsh, John Williams, Michael Barr, Michelle Bowman, Lisa Cook, Beth Hammack, Philip Jefferson, Neel Kashkari, Lorie Logan, Anna Paulson, Jerome Powell and Christopher Waller. No one voted against.

Why it moved

Warsh’s explanation at his press conference was blunt. He said that “for more than five years, inflation has been running above target”, and added: “The plain fact is that inflation is too high and has been for too long.” He estimated that prices, measured by the personal consumption expenditures (PCE) index the Fed prefers, were about 3.6% higher in August than a year earlier, and about 3.2% higher excluding food and energy. “This summer’s inflation readings do not tell me that underlying trends have meaningfully improved,” he said.

At the same time, he argued, the economy could withstand higher rates. Unemployment was around 4.1%, hiring and business investment had improved, and credit was flowing freely. “I would be hard pressed to describe broad financial conditions as restrictive,” Warsh said. “This view was widely shared by the Committee. So we removed a dose of accommodation.”

Reuters identified three sources of price pressure: import tariffs introduced by the Trump administration, an energy shock following the start of the US-Israeli war with Iran, and heavy capital spending connected to the artificial intelligence boom. The minutes show officials discussing the last two directly, noting that geopolitical developments had pushed up prices for crude oil and refined fuels and that “surging AI-related investments were contributing to inflation pressures”.

One reporter put the obvious objection to Warsh: a quarter-point increase does not reopen the Strait of Hormuz, the shipping route for Gulf oil. He agreed that the Fed cannot control any individual price. “But what we can do, and will do, is ensure that any change in relative prices don’t broaden out, don’t have second- and third-order effects in the economy,” he said. Reuters noted that the new statement dropped an earlier reference attributing high inflation to supply shocks.

What officials expect next

Fed policymakers publish their individual forecasts four times a year. In September the median projection was for the policy rate to reach 4.1% by the end of 2026 and stay there through 2027, implying one more quarter-point increase. Reuters reported that 16 of 18 policymakers anticipated at least one further rise before the end of the year.

The same projections put PCE inflation at 3.7% for 2026, falling to 2.3% in 2027, with growth of 2.3% and unemployment steady at about 4.1%. Reuters reported that inflation was not projected to return to 2% until 2029, a year later than previously expected.

Warsh himself declined to offer a forecast, as he had in June, and refused to hint at future decisions. “I’m not in the forward guidance business,” he said.

A chair chosen to cut

The politics of the decision were hard to miss. Reuters described Warsh as having been selected by President Donald Trump “with an expectation that he would cut rates”, and said the increase was likely to ease doubts that he would hold back out of deference to the White House. Asked what message the move sent to the president, Warsh replied: “I’ve got nothing for you.”

The rise came less than two months before congressional midterm elections. Reuters reported that petrol prices were about a third higher than a year earlier and that the average rate on a 30-year fixed mortgage was approaching 7%. Trump responded on social media by calling for US rates of 1% or less, without attacking Warsh directly, Nation Thailand reported.

The wider picture

The Fed was not acting alone. Warsh told reporters that after recent meetings with counterparts abroad “it was evident that most advanced economies are facing price pressures”. The European Central Bank had raised its own rates six days earlier.

Long-term borrowing costs were already climbing. The yield on 10-year US Treasury bonds had touched a 19-year high above 5% two days before the decision, Reuters reported, and moved little afterwards because investors had expected the increase.