WASHINGTON, United States – The Federal Reserve raised its benchmark interest rate Wednesday for the first time since July 2023, citing inflation that remains above its 2% target and signaling a renewed focus on price stability.
The Federal Open Market Committee voted unanimously to increase the federal funds target range by a quarter percentage point, from 3.5%–3.75% to 3.75%–4%. The decision took effect following the Federal Reserve’s September 15–16 meeting.
The move ends a period of unchanged rates that began after the central bank’s previous rate increase in July 2023. The Fed had cut rates during the subsequent easing cycle before holding the target range at 3.5%–3.75% through its meetings earlier this year.
Inflation remains the central concern
The Federal Reserve said economic activity is expanding at a solid pace, while domestic spending has remained resilient. It also pointed to strong productivity growth and robust capital investment.
But inflation remains above the central bank’s 2% objective.
“Inflation remains elevated,” the Federal Reserve said in its policy statement, adding that the latest action was intended to support a “timelier return” to its 2% goal.
The Fed’s latest economic projections put median personal consumption expenditures inflation at 3.7% for 2026, compared with 2.3% projected for 2027 and 2.1% for 2028. Median core PCE inflation, which excludes food and energy prices, was projected at 3.4% for 2026 and 2.5% for 2027.
The Federal Reserve’s July monetary policy report had already documented a significant increase in inflation during the preceding year, including further upward pressure after energy prices surged following the outbreak of conflict in the Middle East.
Fed sees a stronger economy
The rate increase came alongside a more positive assessment of economic activity.
The Fed said job gains have kept pace with the available workforce and that the unemployment rate has changed little. Its September projections placed the median unemployment rate at 4.1% for both 2026 and 2027, down from the 4.3% figures in its June projections.
The central bank also raised its median projection for real GDP growth in 2026 to 2.3%, from 2.2% in June.
That combination — stronger economic activity alongside persistent inflation — gives policymakers a different policy problem from the period when the Fed was primarily responding to weakening growth and labor-market conditions.
Fed Chair Kevin Warsh said after the decision that the economy had strengthened since the previous meeting, while inflation remained the principal problem facing the central bank.
Rate path points higher
The Fed’s new projections show policymakers expect interest rates to remain relatively restrictive.
The median projection for the federal funds rate at the end of 2026 is 4.1%, compared with 3.8% in the June projections. The median projection falls to 3.9% in 2028 and 3.6% in 2029.
Those projections are not commitments to a predetermined path. They represent individual policymakers’ assessments of the appropriate policy rate based on their economic outlook and assumptions.
The Fed also said uncertainty remains elevated, citing geopolitical developments among the factors affecting its assessment of the economy.
Higher rates reach consumers and businesses
The federal funds rate is the benchmark for overnight lending between banks, but changes in the Fed’s policy rate can influence borrowing costs throughout the economy.
Higher rates can feed into the cost of credit cards, auto loans, business financing and other forms of borrowing. Savings products can also be affected as banks adjust the rates they offer depositors.
The effect on longer-term borrowing costs, including mortgages, is more complicated because those rates also respond to bond-market conditions and expectations about future monetary policy.
The latest increase therefore does not mean that every consumer interest rate will immediately rise by the same quarter percentage point.
Fed maintains restrictive stance
Alongside the rate decision, the Federal Reserve said it would continue operating with an ample-reserves framework.
The central bank separately raised the interest rate paid on reserve balances to 3.90%, effective Sept. 17. It also raised the primary credit rate by a quarter percentage point to 4%.
The unanimous vote marked a clear shift from the Fed’s recent period of holding rates steady. The decision also places greater weight on bringing inflation back toward the central bank’s target while policymakers assess whether stronger economic growth can continue.
For now, the Federal Reserve’s projections show inflation remaining above 2% through 2027 before moving closer to the target in subsequent years.
Reporting Credit: Federal Reserve — September 16 FOMC policy statement, monetary-policy implementation decision and Summary of Economic Projections; Federal Reserve Monetary Policy Report — inflation and economic conditions; Federal Reserve Chair Kevin Warsh — post-decision assessment of the economy and inflation.
