US central bank raises interest rates for first time in three years
Here’s why central banks raise interest ratespublished at 18:11 BST
Michael Race
Business and economics reporter in Washington DC
The higher rate range set by the Fed in recent years has meant people are paying more to borrow money for things like mortgages
Interest rates are the Federal Reserve’s main tool in trying to maintain the annual rate of inflation at – or close to – its target of 2%.
Inflation in US has been running above that level for some time and latest figures show consumer prices rose 3.4% from August 2025, to this year.
Fed chair Kevin Warsh has said “the Fed’s predominant focus right now should be on prices” – fuelling expectations of a rate hike.
The theory behind increasing interest rates to tackle inflation is that by making borrowing more expensive, more people will cut back on spending and that leads to demand for goods falling and price rises easing.
The rate range set by the Fed heavily influences the borrowing rates set by banks and other lenders.
The higher level in recent years has meant people are paying more to borrow money for things like mortgages and credit cards, but savers have also received better returns.
There’s always a balance between raising rates to tackle inflation. High rates can lead to lower inflation, but there’s a risk it can lead to businesses holding off of investing and creating jobs, and stunt economic growth.