Fed raises interest rates for the first time since 2023; Trump claims the rate should have been nearly four times lower

The United States Federal Reserve (Fed) raised its benchmark interest rate by 25 basis points to a range of 3.75%-4%, and the majority of Fed officials anticipate another hike before the end of the year. The Fed's decision increases borrowing costs in the United States, caused a drop in US stock markets, and drew a sharp reaction from the White House.

• The Fed's decision and its causes

The Federal Open Market Committee (FOMC), the Fed body that sets interest rates, voted 12-0 to raise the benchmark interest rate target range by a quarter of a percentage point to 3.75%-4%, according to the statement released on Wednesday, September 16, at 2:00 PM Washington time (9:00 PM Romanian time). This marks the first Fed rate hike since July 2023, according to Yahoo Finance. The Fed had held the rate at 3.50%-3.75% since December 2025, after most officials concluded that the decline in inflation was being delayed by temporary factors, according to Bloomberg, as cited by Yahoo Finance.

At the July meeting, three FOMC members-Beth Hammack, Neel Kashkari, and Lorie Logan-had already voted for a 25-basis-point hike, according to a comparison of the July and September statements published by Yahoo Finance. Stephen Juneau, an economist at Bank of America, explained to Yahoo Finance that the Fed is now reversing the rate cuts implemented last year to protect the labor market; this time, the move is intended to guard against the risk of higher inflation. In his press conference statement, Fed official Kevin Warsh noted that inflation has been above target for over five years and that price stability is, therefore, the Fed's priority. According to CNN, inflation has risen since the beginning of the year against the backdrop of the war with Iran. In the same statement released by the Fed, Warsh indicated that hiring, private-sector earnings, and business investment have improved in recent months, that the unemployment rate remains around 4.1%, and that PCE inflation was likely around 3.6% in August, with core PCE inflation at approximately 3.2%. Yahoo Finance notes that the hike was anticipated following Warsh's speech at Jackson Hole, an August jobs report that far exceeded expectations, and core inflation data slightly above estimates; in the hours leading up to the announcement, the market assigned a probability of about 90% to the increase. Oil prices climbed back above $100 per barrel amid tensions in the Middle East, according to Yahoo Finance.

In its July statement, the FOMC attributed inflation partly to supply shocks, including in the energy sector; the September statement omitted this explanation and introduced language stating that the decision would support a faster return to the 2% target, according to a comparison published by Yahoo Finance. In the press conference statement released by the Fed, Warsh said that overall financial conditions could not be described as restrictive and that the FOMC had therefore reduced monetary stimulus. According to the same statement, Warsh recalled that, at Jackson Hole, he had set a condition for a rate hike: the Fed must be confident that core inflation is moving toward the target clearly and rapidly enough. Warsh stated that the FOMC deemed this condition unmet and noted that inflation "is too high and has been too high for too long," according to the statement released by the Fed.

Projections published by the Fed show that, of the 18 participants who submitted estimates, 12 foresee one additional 25-basis-point hike in 2026, 4 foresee two hikes, and 2 foresee no further hikes. The median projected interest rate for the end of 2026 rose to 4.1% from 3.8% in the June projections, while the median for the end of 2027 climbed to 4.1% from 3.6%. In a statement released by the Fed, Warsh noted that, just as in June, he did not submit a projection of his own. According to the Fed's projections, officials estimate PCE inflation of 3.7% for 2026 (up from 3.6% in June), core PCE inflation of 3.4% (up from 3.3%), an unemployment rate of 4.1% (down from 4.3%), and economic growth of 2.3% (up from 2.2%).

• Political reactions

Following the Fed's announcement, President Donald Trump called on Truth Social for rapid interest rate cuts, writing that the U.S. interest rate should be 1% or lower because the United States has the best credit in the world, according to CNBC. In the same post, Trump wrote that the United States supports almost every country in the world and that the situation cannot continue, according to CNBC. Lowering the interest rate to 1% would require cuts of the magnitude usually implemented by central banks only during severe financial crises, notes Stocktwits, in a report cited by Yahoo Finance.

When asked by reporters upon his arrival in North Carolina whether he still had confidence in Warsh, Trump answered in the affirmative; he stated that Warsh leads a board appointed by others and that he had told Warsh he could vote alongside the other members, as his vote would not alter the outcome, according to CNBC. CNBC notes that Trump's statement could undermine the assurances given by both Trump and Warsh regarding the Fed's independence; Trump also stated that he did not believe Warsh's decision was based on what the president had told him.

Kush Desai, a White House deputy press secretary, called the hike "rather unfortunate" in an interview with Fox News and stated that the decision lacked a compelling economic justification, according to Yahoo Finance; Desai argued that current price increases stem entirely from an energy supply shock. According to NBC News, Desai said that higher interest rates would stifle economic progress and make mortgages more expensive for Americans. The day before the decision, Christopher Phelan, Chairman of the White House Council of Economic Advisers, had told CNBC that a rate hike would be a mistake.

Warsh declined to comment on his discussions with Trump, stating he had nothing to say regarding the conversation with the president, according to CNBC. Warsh described the Fed's independence as a two-way street: the Fed handles only monetary policy, leaving those in charge of trade and fiscal policy to manage their respective areas, according to Yahoo Finance. On September 4, Trump had posted on Truth Social that he would halt trade with countries running a trade deficit with the United States if the Fed did not lower interest rates, according to Yahoo Finance.

Democrats linked the rate hike to the administration's economic policy: Brendan Boyle, the top Democrat on the House Budget Committee, stated that the increase demonstrates the economic failure of Trump and the Republicans, according to Yahoo Finance. The hike comes seven weeks before the midterm elections, with the cost of living having become a key issue, according to the Associated Press, as cited by PBS.

• Consequences in the United States

The Dow Jones Industrial Average lost 631.21 points-or 1.21%-on Wednesday, closing at 51,461.90 points; the S&P 500 fell 0.45% to 7,551.81 points, and the Nasdaq Composite dropped 0.01% to 25,978.42 points, according to CNBC. All three indices had been rising during the trading session prior to the Fed's announcement and Warsh's press conference, CNBC reported. Major banks experienced their worst day since February amid fears of further rate hikes, with the State Street SPDR S&P Bank ETF falling 2.6%, according to CNBC. For the Dow Jones, it was the worst day in nearly a month, according to CNN. The yield on 2-year U.S. government bonds rose 6 basis points on Wednesday to its highest level since July 2024, standing at 4.7145% on Thursday, according to Reuters. The 10-year bond yield returned to its highest level since 2007 on Wednesday, per CNN, and stood at 5.02% at the U.S. market close, according to The Motley Fool. On Thursday morning, the 10-year yield was at 4.9917%, while the 30-year yield had fallen 2 basis points to 5.3328%-below the 19-year high of 5.401%-according to Reuters. Warsh attributed the rise in U.S. yields to the strength of the economy, competition for capital driven by heavy corporate investment, and the geopolitical situation, according to TheStreet. Padhraic Garvey, Head of Americas Research at ING, told Reuters that ING views the 5.25% level as the next benchmark for the 10-year yield.

Collin Martin, Head of Fixed Income Research at Schwab, told Yahoo Finance that the increase raises the cost of short-term variable-rate loans, such as home equity lines of credit, credit cards, and auto loans. Interest rates on mortgage rates do not track the Fed's interest rate directly but rather the yield on 10-year Treasury bonds; recently, they have approached or exceeded the 7% mark, depending on the reporting source, according to Yahoo Finance. Danielle Hale, chief economist at realtor.com, told CNN that high mortgage rates would dampen home sales growth in the final quarter of 2026. For savers, interest rates on certificates of deposit have begun to rise, according to Yahoo Finance.

CNN notes that higher interest rates can weaken an economy already showing signs of slowing, meaning the Fed's battle against inflation could come at the cost of economic growth. In a statement released by the Fed following the press conference, Warsh argued that the least wealthy Americans benefit the most from sustainable economic growth, a robust labor market, and stable prices.

Goldman Sachs now projects another rate hike in October, reasoning that the wording of the FOMC statement supports consecutive increases; additionally, futures contracts indicate a 50% probability of an October hike and fully price in an increase by December, according to Reuters. However, Kay Haigh of Goldman Sachs Asset Management believes the Fed will likely skip the October meeting due to the approaching midterm elections, according to the Associated Press, as cited by PBS. Stephen Juneau of Bank of America anticipated rate hikes in both October and December, according to Yahoo Finance. Probabilities calculated by CME FedWatch based on Fed funds futures prices fluctuate throughout each trading day.

• Eurozone

On September 10, the European Central Bank (ECB) raised its three key interest rates by 25 basis points: the deposit facility rate rose to 2.50%, the main refinancing operations rate to 2.65%, and the marginal lending facility rate to 2.90%, effective September 16, 2026, according to the ECB's monetary policy statement. The ECB had previously raised the deposit facility rate to 2.25% in June 2026, following eight cuts that had lowered it from 4% to 2%, according to Morningstar. According to the ECB's monetary policy statement, ECB staff project inflation at 3.0% in 2026, 2.5% in 2027, and 2.1% in 2028, and economic growth at 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028; inflation risks are tilted to the upside, while growth risks are tilted to the downside. In the same statement, the ECB indicated that future decisions would be made on a meeting-by-meeting basis, data-dependent, without committing to a specific interest rate trajectory. Following the ECB's decision, markets were pricing in two further ECB rate hikes in 2026, according to Morningstar. The spread between the Fed's rate (3.75%-4%) and the ECB's deposit facility rate (2.50%) makes dollar-denominated investments more lucrative than euro-denominated ones, and this interest rate differential is one of the factors supporting the dollar against the euro.