In a clean sweep, the Fed’s Open Market Committee voted 12–0 to raise interest rates yesterday by a quarter point to the 3.75%–4% range. It’s the first time the Fed has increased interest rates since July 2023—and most Fed officials expect to do so one more time this year, since inflation remains well above the Fed’s 2% target. Everyone knew it was coming. With the Fed’s preferred inflation measure showing July inflation holding strong at 3.7% compared to the same time last year, a separate measure of inflation also ratcheting up, and no end in sight for the war in Iran sending oil prices up, investors and economists would have been more surprised if Fed Chair Kevin Warsh didn’t announce a rate increase. Still, it’s a big deal, since these rates set borrowing costs, affecting loans for individuals and businesses and everything from mortgage rates to AI investment. But just because it was anticipated doesn’t mean there wasn’t drama. The rate cut comes after President Trump has repeatedly called for rate cuts…and nominated Warsh as Jerome Powell’s successor assuming he’d deliver them: - The hike was viewed as a positive sign for Fed independence, and Warsh dodged numerous questions during his post-announcement press conference about the president’s potential reaction.
- Trump posted on social media claiming that rates should be at 1% “or less,” and urged the Fed to lower interest rates without calling out anyone in particular.
How have markets responded?Much of the movement happened before the announcement, with mortgage rates and Treasury bond yields spiking, as markets anticipated rates would rise. But Warsh’s brief remarks yesterday, in which he repeatedly mentioned that inflation had not abated, sent stocks down over fears of future increases. (Warsh spoke for just under 30 minutes rather than the typical 45 minutes.) Looking ahead…while Warsh was careful not to precommit to any future move, comments underlining his dissatisfaction over inflation’s trajectory drove home the central bank’s intent.—MM | 
