Fed raises US rates for first time in three years
The US Federal Reserve raised interest rates for the first time in three years, piling pressure on the Bank of England to follow suit.
The central bank’s Federal Open Markets Committee (FOMC) on Wednesday announced a 0.25 percentage point increase in interest rates to 3.75pc to 4pc – and signalled more hikes to come.
Most FOMC officials now expect to raise interest rates at least once more by the end of 2026, with some anticipating two additional hikes.
It is the first time the Fed, led by Kevin Warsh, has raised interest rates since July 2023.
Stocks on Wall Street fell after the decision while US borrowing costs rose. The dollar also strengthened.
The decision will have significant implications for the Bank of England, whose Monetary Policy Committee (MPC) will meet on Thursday to make its own interest rate decision.
A hike could raise further pressure on Prime Minister Andy Burnham, who would have to confront higher borrowing costs impacting the UK economy.
Analysts have warned that if the MPC fails to follow other central banks like the Fed and defies market expectations, it could trigger a fall in the value of the pound that would drive up inflation even further.
The Fed’s decision comes after the European Central Bank raised interest rates last week in a move that president Christine Lagarde said was a “no brainer” in response to the war in the Middle East.
The US rate hike is likely to put Mr Warsh, who replaced Jerome Powell as chair in May, on a collision course with Donald Trump, who appointed him to the role.
Mr Trump has heaped pressure on the central bank to slash rates and previously waged war against Mr Powell, who he nominated as chair during his first time, calling him a “numbskull” and threatening to sack him in a move that shocked central bankers around the world.
Earlier this week, Mr Trump said the US “should be paying the lowest interest rate in the world”.
Asked by reporters if he had a message for the president, Mr Warsh said: “I’ve got nothing for you on a discussion with the president.”
Mr Warsh said he knew that the central banks’ decision would “spill over to the rest of the world”.
Referring to his recent meetings with central bankers, who included Bank of England Governor Andrew Bailey, Mr Warsh said: “What I heard around the table from most of the advanced economies, because they’re suffering from price pressures too.
“They’re making their own choices consistent with their remit. It tells me a couple things. One is when the Federal Reserve makes a policy choice, it matters not just to the US economy, but it spills over to the rest of the world.”
US government borrowing costs rose after the decision, with yields on 10-year treasuries rising by 0.01 percentage points to surpass 5pc.
Rates had hit their highest level since 2007 earlier in the week after fresh escalations in the Middle East fuelled fears of an inflation crisis.
American stocks fell, as higher rates will make it harder for businesses to borrow. The benchmark S&P 500 dropped by 0.67pc while the Dow Jones Industrial Average slumped by 1.4pc. The dollar also rose to its highest level in a month against a basket of other currencies.
The FOMC raised its inflation forecast after a fresh surge in oil prices since its last meeting.
Committee members now expect US inflation will average 3.7pc this year, up from 3.6pc in their June forecast.
The latest official figures show US prices are currently rising at a rate of 3.7pc, nearly twice the Fed’s 2pc target.
They also cut their unemployment forecasts and raised their expectations for economic growth.
FOMC members said they anticipated US GDP will rise by 2.3pc this year, up from the 2.2pc growth they had forecast in June.
Olu Sonola, head of US Economics at Fitch Ratings warned that US households will feel fresh pain from higher borrowing costs.
Mr Sonola said: “The economy’s ability to withstand higher rates should not be confused with consumers’ ability to absorb them.
“Aggregate resilience will mask a widening divide between consumers insulated from higher rates and those being squeezed by increasingly expensive credit.”
09:28pm
Dollar lifted by interest rate raise
The dollar rose against a basket of currencies after the Fed raised interest rates.
The dollar index, which measures the currency against major peers, was up 0.3pc at 99.961, the highest in nearly five weeks.
The euro was 0.3pc lower at $1.1502.
Sterling fell 0.5pc to $1.34155. British inflation accelerated to a five-month high in August, a day before the Bank of England is expected to leave rates steady.
09:09pm
Kevin Warsh says Fed’s focus is on pushing inflation down
Kevin Warsh has said the Fed is focused on inflation and that its independence relies on staying in “our lane”.
Mr Warsh said: “Our predominant focus is on the price stability side of our mandate. The plain fact is that inflation is too high, and has been for too long”
He said the decision to lift interest rates wasn’t influenced by financial markets.
“We made this decision today based on our assessment of the situation. I’ll observe market prices and see what they have to say. But today was our decision.”
“Part of the independence of the Federal Reserve is we stay in our lane. We let people that do trade policy and fiscal policy stay in their lane too. That’s how we can stand up here and call them the way we see them.”
08:36pm
Interest rate rise risks backlash from Trump
Kevin Warsh faces backlash from Donald Trump over the decision to lift interest rates for the first time in three years, an analyst has warned.
Richard Carter, head of fixed interest research at Quilter Cheviot, said: “This is a pivotal moment for Kevin Warsh too. He was brought into the Fed as Trump’s guy, poised to deliver the rate cuts he so desperately wants.
“However, his first move of significant impact is in fact an interest rate rise, and this risks hampering the relationship between the two and thus a repeat of the barbs Jerome Powell suffered during his tenure.”
“Warsh will be hoping this action is swift, although energy prices are ultimately what is driving inflation right now rather than what is going on within the US economy.”
08:18pm
US stocks fall
US stocks have dropped on the Fed’s decision to lift interest rates by 25 basis points.
The S&P 500 index of America’s leading companies was down 0.6pc following the news of the Fed’s decision.
The tech-heavy Nasdaq 100 index fell 0.1pc after the interest rate hike.
The Dow Jones Industrial Average dropped 1.1pc.
The Russell 2000 index of small-cap stocks fell 0.2pc.
07:59pm
Competition for capital is driving up US borrowing costs
Kevin Warsh said a recent surge in US government borrowing costs was driven by the race for artificial intelligence investment.
Asked what he thought the bond markets were telling him, Mr Warsh said: “Why did yields rise? I’ll give you three reasons.
“First is economic strength. I mean, part of the reason why we’ve seen over the course of 2026 long-term yields go up is the economy is strengthened.
“Second reason: competition for capital. The surge in capital expenditures, which I referenced in my remarks, is real, and the so-called hyperscalers are out in the market raising funding, and so the competition for capital is real, and I think it partly explains the increase in yields.
“The third is geopolitics. The situation hotspots around the world are driving long-term yields.”
07:59pm
Fed’s decision will “spill over to the rest of the world”
The Fed’s decision to raise interest rates will “spill over to the rest of the world”, Kevin Warsh has said.
Asked if he was looking at other central banks such as the European Central Bank, which raised interest rates last week, Mr Warsh said: “I’ve spent some time foreign central bank counterparts […] What I heard around the table from most of the advanced economies, because they’re suffering from price pressures too.
“They’re making their own choices consistent with their remit. Tells me a couple things. One is when the Federal Reserve makes a policy choice, it matters not just to the U.S. economy, but it spills over to the rest of the world.
“To a lesser extent, that’s true for them too. When foreign central banks make decisions where they’re confronted with higher prices, and they choose, consistent with their remit, to raise rates, then they’re helping to quash inflation in their countries, and there’s spillovers and spillbacks in both directions.”
07:52pm
US economy is getting stronger
The outlook for the US economy has stronger since the Fed’s last meeting, Kevin Warsh has said.
Asked what had changed since the central banks’ last decision in July, Mr Wash said: “I’ll highlight three things that have happened in that inter-meeting period.
“One is […] the strength of the economy. There’s been a pretty wide-ranging set of data, including in the labor markets, that the economy has strengthened. It’s a judgment that I have and the committee has.
“Second, inflation trends. My judgment some weeks ago was that the inflation summer trends weren’t passing the test. I’ve seen very little information since that would make me reverse that decision, so I’ve stuck with it.
“The third thing that’s changed in seven weeks is geopolitics. There’s no hiding from hot spots around the world, and our judgment about what is the most likely or least likely of the geopolitical situation has changed. All three of those things led themselves to a firm unanimous decision today.”
07:52pm
“I’ve got nothing for you on a discussion with the President,” says Kevin Warsh
Fed chair Kevin Warsh declined to comment on whether he had a message for Donald Trump, who has repeatedly called on the Fed to slash interest rates.
Asked he had anything to say to the President, Mr Warsh said: “I’ve got nothing for you on a discussion with the president.”
Earlier this week, Mr Trump said the US “should be paying the lowest interest rate in the world”.
07:50pm
Kevin Warsh says interest rate rise was a “serious decision”
Fed Chair Kevin Warsh said the central bank’s interest rate rise was a “responsible decision”.
Speaking to reporters, Mr Warsh said: “The decision we made today was a sober decision, serious decision, responsible decision, one that we have been preparing for and thinking about in my 110 or 20 days here.”
He added: “We made this decision today based on our assessment of the situation, based on our assessment of the trajectory for employment, based on our judgment on the strength of the economy.”
07:42pm
Unemployment forecast slashed
Fed committee members have slashed their unemployment forecasts for this year after they upgraded their expectations for growth.
FOMC members cut their expectations for the unemployment rate from the 4.3pc they had anticipated in June to 4.1pc.
They also cut their forecasts for 2027 from 4.3pc to 4.1pc and for 2028 from 4.2pc to 4.1pc.
07:42pm
Higher growth forecast
Fed committee members have raised their expectations for US economic growth this year and next.
Federal Open Market Committee (FOMC) members said they anticipated US GDP will rise by 2.3pc this year, up from the 2.2pc growth they had forecast in June.
They also raised their forecast for 2027 GDP growth from 2.3pc to 2.4pc.
The FOMC said: “Economic activity is expanding at a solid pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient.
“Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little.”
07:41pm
Kevin Warsh, the chairman of the US Federal Reserve, speaks after the rates decison
07:23pm
Higher inflation forecast
The Federal Reserve has raised its inflation forecast after a fresh surge in oil prices.
Federal Open Markets Committee (FOMC) members now expect US inflation will average 3.7pc this year, up from 3.6pc in their June forecast.
They maintained their expectations that inflation will be 2.3pc in 2027, but they increased their 2028 forecast to 2.1pc, up from 2pc previously.
It comes after oil prices surged to $106 per barrel as the war in Iran intensified.
07:13pm
Fed signals one more rate rise to come
The Fed has signalled that it expects to make one more interest rate rise before the end of the year.
Projections published by the Federal Open Markets Committee (FOMC) showed 16 of 18 officials expect to raise interest rates at least once more by the end of 2026.
Four of these members said they anticipate making two additional interest rate hikes.
The FOMC’s median forecast for interest rates this year has climbed from 3.75pc in June to 4.1pc.
On average, members expected rates to stay at 4.1pc in 2027, however, eight officials saw interest rates climbing to 4.4pc next year.
06:54pm
25 basis point interest rate hike ‘looks all but certain’
An interest rate hike to 4pc “looks all but certain”, Michael Field, chief equity strategist at Morningstar has said.
Mr Field said: “A 25-basis point increase in US interest rates to 4% looks all but certain today. The size of the move is unlikely to surprise markets.”
“Instead, investors will be focused on the direction of travel and whether inflation proves more persistent than many expect, potentially keeping interest rates higher for longer.”
06:49pm
Markets poised for a boost from higher interest rates, economist says
Markets are set to be boosted by a decision to lift interest rates from the US Federal Reserve, an economist has said.
José Torres, senior economist at Interactive Brokers, said: “The market is poised to benefit from an interest rate hike on Wednesday, which could ease expectations of price pressure by demonstrating that the Fed is serious about fighting above-target inflation.”