In an effort to tamp down inflation, the Fed raises interest rates

The Federal Reserve is raising its benchmark interest rate for the first time in three years to tamp down persistent inflation after months of war-related spikes in energy and food prices.The increase from 3.75% to 4% had been widely expected by financial markets. Kevin Warsh, the new Fed chairman picked by President Donald Trump, said last month that he wanted inflation to come down “at sufficient speed,” after previously signaling a neutral stance. The Fed’s short-term lending rate affects borrowing costs across U.S. and global markets, and is one of its main levers used to target inflation and support full employment.The decision by the 12-member Federal Open Market Committee, which Mr. Warsh chairs, has become a test of its credibility as an independent agency in the face of political and legal attacks by President Trump. His campaign to oust Jerome Powell, Mr. Warsh’s predecessor, raised concerns about the Fed’s independence and its willingness to take measures that could be politically damaging, such as raising interest rates ahead of this year’s midterms. Mr. Trump has repeatedly called for lower rates to boost economic growth and excoriated Mr. Powell’s record. But the economic fallout from Mr. Trump’s unpopular war with Iran that has choked off energy shipments made it harder to justify lowering rates. Diesel prices are over $6 a gallon, hitting record highs that push up costs in freight, farming, and many industries. Fuel prices have become a serious drag on Republicans’ chances of retaining control of Congress; concerns about prices and affordability top the list of voters’ priorities in virtually every poll.“The higher oil prices have definitely weighed on everything,” says Mickey Levy, the former chief economist at Bank of America, who is now a visiting fellow at the Hoover Institution. “It’s surprising that the economy has been so resilient.”That resilience poses a dilemma for the Fed: It wants the labor market to remain strong and for employers to keep hiring. War-related energy shocks may be transitory. But runaway inflation could end up hurting the economy more, particularly if the Fed has to hike rates higher in the future than it would otherwise do. “The labor side of the Fed’s congressional remit is in good shape. Yet for more than 5 years inflation has been running above target,” Mr. Warsh told a press conference in Washington after the rate-hike announcement. ”The plain fact is that inflation is too high and has been for too long.”Even before the Fed raised its benchmark rate, however, commercial interest rates were already higher because of rising global bond yields. The yield on the 10-year U.S. Treasury, one of the world’s most-traded financial assets, rose this week to its highest level since 2007. Investors typically demand higher returns on long-term bonds to compensate for the risk of higher inflation. That, in turn, pushes up the cost of mortgages and other types of consumer debt.Not all the upward pressure on rates is coming from the disruption to Middle East oil and gas. The flood of debt issued by tech companies investing in artificial intelligence is also pushing up global bond yields (which move in the opposite direction of bond prices). The AI boom is another reason why the United States’ economy is running hot, which also factors into the Fed’s assessment of when inflationary pressures may ease.Last year, the FOMC under Mr. Powell reduced its benchmark rate three times in response to what appeared to be weakening labor markets. Mr. Warsh was among those who at the time criticized the Fed for taking its foot off the anti-inflationary brakes. The cuts came amid a public row between Mr. Trump and Mr. Powell, whom the president threatened to prosecute for fraud. Mr. Trump also tried to fire Fed governor Lisa Cook, leading to a Supreme Court ruling against her removal. Deepen your worldviewwith Monitor Highlights.Politics with respectGet political stories with respectful analysis.There's a world of new ideas in everyBooks newsletter.There's more to life, enrich yours withCulture & Learning weekly.Follow humanity's discoveries withScience & Nature stories in your inbox.Gain a spiritual perspectivefrom the stories in your inbox.Want to understand the deeper impact of critical events? Learn the Monitor's insight.Already a subscriber? Log in to hide ads. This battle with Mr. Powell, who stepped down in May as chairman but remains a Fed governor, set the stage for today’s rate decision under Mr. Warsh. Analysts are watching to see if the increase is a “one-and-done” hike or part of a tightening cycle, which has been the past pattern. Financial markets had already priced in two or more hikes in 2026.But that isn’t a given, said Michael Strain, an economist at the right-leaning American Enterprise Institute. “If Chairman Warsh is looking for an opportunity to signal to the market that the Warsh Fed is different than its recent predecessors, then this is that opportunity,” he wrote on X, ahead of Wednesday’s announcement. ALREADY A SUBSCRIBER? LoginReal news can be honest, hopeful, credible, constructive.The Christian Science Monitor was founded in 1908 to lift the standard of journalism and uplift humanity. We aim to “speak the truth in love.” Our goal is not to tell you what to think, but to give you the essential knowledge and understanding to come to your own intelligent conclusions. Join us in this mission by subscribing.