The United States Federal Reserve has raised its benchmark interest rate by a quarter of a percentage point, marking its first rate increase since 2023 as policymakers moved to contain persistent inflation and renewed price pressures.
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At the conclusion of its two-day meeting on Wednesday, September 16, 2026, the Federal Open Market Committee unanimously voted to increase the federal funds target range by 25 basis points, from 3.50%-3.75% to 3.75%-4.00%. The decision was approved by a 12-0 vote.
The central bank said economic activity continued to expand at a solid pace, with resilient domestic spending, strong productivity growth and robust capital investment. It nevertheless said inflation remained elevated and that geopolitical developments had added to uncertainty surrounding the economic outlook.
“Today’s policy action will support a timelier return to the Committee’s 2 percent goal,” the Fed said in its statement, reiterating that price stability remains a central objective of monetary policy.
The increase comes after the latest official inflation data showed that the U.S. Consumer Price Index rose 0.4% in August and 3.4% over the preceding 12 months. Energy prices were an important contributor: the energy index increased 2.1% during August, while gasoline rose 3.9% for the month. Over the year, the energy index was up 16.3%.
Federal Reserve Chair Kevin Warsh said after the meeting that policymakers remained concerned that inflation had stayed above the central bank’s 2% objective for too long. Reuters reported that Warsh stressed that the Fed wanted clearer evidence that underlying inflation was moving sustainably towards target before policymakers could be satisfied that price pressures were under control.
The rate increase may not be the final adjustment this year. Economic projections released alongside the decision showed that 16 of the 18 Federal Reserve policymakers expect at least one additional rate increase by the end of 2026, while two projected that the new 3.75%-4.00% range would be appropriate at year-end.
The median projection puts the federal funds rate at about 4.1% at the end of 2026, compared with a June projection of 3.8%. The Fed also raised its median projection for 2026 economic growth to 2.3%, while forecasting an unemployment rate of 4.1%.
On inflation, policymakers projected headline Personal Consumption Expenditures inflation of 3.7% for 2026, while core PCE inflation, which excludes food and energy, was projected at 3.4%. The Fed’s longer-term inflation objective remains 2%.
The decision comes amid disagreement between the Federal Reserve and President Donald Trump over the appropriate level of U.S. interest rates. Trump has repeatedly called for lower borrowing costs and, following Wednesday’s decision, said rates should be reduced to 1% or lower.
Warsh, who became Federal Reserve chairman earlier in 2026, did not engage publicly with the President’s criticism during his post-meeting remarks, instead emphasising the central bank’s inflation mandate and the economic data guiding policy decisions. Federal Reserve records confirm Warsh is serving as chairman and presided over the September meeting.
The Fed has also pointed to geopolitical developments as a source of heightened uncertainty. Oil and other energy prices have risen sharply amid international conflicts and supply disruptions, contributing to renewed inflationary pressure and higher borrowing costs in financial markets.
Warsh said the Federal Reserve cannot directly control individual prices such as oil or groceries, but monetary policy can seek to prevent temporary price shocks from spreading more broadly through wages, services and other parts of the economy.
Financial markets reacted to the decision and accompanying projections by reassessing the likelihood that borrowing costs will remain elevated for longer. Reuters reported declines in major U.S. stock indexes and upward pressure on shorter-term Treasury yields after investors absorbed the prospect of further tightening.
The quarter-point increase will also have wider implications for borrowing because the federal funds rate influences interest rates across the U.S. economy, including rates on credit cards, business loans and other forms of short-term credit. Mortgage rates are not set directly by the Fed but can also be affected by broader expectations for inflation and Treasury yields.
The Federal Reserve’s next scheduled policy meetings are set for October 27-28 and December 8-9, 2026, meaning policymakers will have two further opportunities this year to decide whether another rate increase is warranted as they assess inflation, employment and economic growth.
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