Fed defies Trump, raises US interest rates for first time in three years

Washington: The US Federal Reserve has lifted interest rates for the first time in three years in a bid to rein in persistently high inflation fuelled by the ongoing war with Iran and its impact on the cost of energy.

While widely expected, the move risks enraging President Donald Trump, who has furiously campaigned for the central bank to cut rates – piling pressure on his new handpicked Fed chairman, Kevin Warsh.

But the Fed’s rate-setting committee voted unanimously on Wednesday (US time) to raise the target rate by 0.25 percentage points, to a band of 3.75 to 4 per cent. In a set of quarterly projections, the Fed also signalled that its committee expects to hike rates again this year to 4.1 per cent.

“The plain fact is that inflation is too high and has been for too long,” Warsh said at a news conference. “This [American] summer’s inflation readings do not tell me that underlying trends have meaningfully improved.”

The call to raise rates was the first unanimous, 12-0 decision by the Fed’s board of governors since May 2025. Warsh described it as a sober and responsible decision, and would not countenance future rate hikes, despite reporters pointing out that increases were rarely one-off.

“I’m not going to prejudge any future decisions we make,” he said. Nor would he comment on any discussions with Trump.

Economists widely tipped a rate rise after last week’s official data showed US inflation stuck at 3.4 per cent – above the Fed’s target of 2 per cent, driven largely by increasing energy costs.

The consumer price index ticked up 0.4 per cent in August in seasonally adjusted terms, with petrol up 3.9 per cent. After falling back to nearly pre-war levels, the price of Brent crude – the international oil benchmark – is back above $US100 a barrel.

That was compounded by new attacks by Iran-backed militants in Yemen and Iraq, targeting oil supplies that avoid the Strait of Hormuz by using the Bab al-Mandab Strait between Yemen and the African coast.

Saudi Arabia closed the East-West Pipeline across the Arabian Peninsula last week following drone attacks. Bloomberg reported the kingdom was aiming to restore about half the pipeline’s capacity within days.

Warsh indicated deteriorating geopolitical circumstances in the seven weeks since the Fed’s last meeting were a factor in its decision to lift rates.

“There’s no hiding from hotspots around the world,” he said. “Our judgment about what is the most likely or least likely in the geopolitical situation has changed.”

Trump has consistently demanded the Federal Reserve cut rates, and led a vicious campaign against former chairman Jerome Powell for his failure to do so. In May, he heaped praise on Warsh while swearing him in at an extravagant White House ceremony.

Two weeks ago, the president posted on social media that the Fed and its new chairman “must get smart” and “BE PATRIOTS for a change”. He also threatened: “LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT.”

Analysts had warned the Fed’s credibility was on the line with Wednesday’s decision, with persistently high inflation leaving Warsh and his fellow governors with little choice but to hike rates or face charges they were being cowed by Trump’s wishes.

Warsh told Congress in July that the Fed had “no tolerance for persistently elevated inflation”. And at the bank’s August 28 summit at Jackson Hole, he said inflation was “concerning”, and that governors had opted to wait for more information before deciding to raise rates.

“This is where the chairman has effectively painted himself into a corner,” said JPMorgan chief global strategist David Kelly on Monday, adding that both Warsh and the governing committee would “lose serious credibility” if they did not raise rates.

Warsh denied that market expectations played a role in the outcome. “Today was our decision,” he said, adding that he preferred to look at trends over time rather than “noisy” individual data points.

While Trump did not immediately comment on the rates decision, White House economics spokesman Kush Desai told Fox News it was “rather unfortunate” and “not backed by a particularly compelling economic case”.

Lingering inflation was “entirely driven by an energy supply shock, by what’s going on with oil prices in the Middle East”, Desai said. “These are things that have nothing to do with interest rates and are not affected by interest rates.”

The Fed’s governing committee said economic activity was expanding at a solid pace, with the unemployment rate steady, productivity growth strong and capital investment robust. Though it noted uncertainty remained elevated, “owing, in part, to geopolitical developments”.

With AP

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