By Andrew Miller
As expected, the Federal Reserve raised interest rates on Wednesday.
The unanimous vote lifted the Fed’s key rate by a quarter of a percentage point, to a target range of 3.75% to 4%. It’s the first increase since 2023.
The reason for the hike comes down to inflation.
Prices are still climbing faster than the Fed would like. Higher rates are its main tool for slowing them down. Chairman Kevin Warsh said the move would support “a timelier return to the Committee’s 2 percent goal.”
As for the economy, Warsh was careful to describe it in good shape.
He pointed to steady growth, strong business investment, and an unemployment rate near 4.1% that has barely moved. A solid economy, in his telling, is what gives the Fed room to focus on prices.
The Fed doesn’t sound finished after just one hike.
Just two Fed officials think Wednesday’s move was enough. Twelve of the 18 officials who submit rate forecasts expect another increase before year’s end, while four others want another two hikes this year.
Beyond this year, the outlook eases.
Officials don’t see rates going any higher in 2027. They’ve penciled in cuts for 2028 and 2029 as they expect inflation to keep cooling.
The Fed’s inflation forecasts show why those cuts sit so far out. It raised its estimate for price growth this year to around 3.7%, expecting a sharp drop in 2027 followed by a slower decline.
By the Fed’s own math, prices won’t be back to its 2% inflation target until 2029.
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