Fed raises interest rates for first time since 2023, citing energy-driven inflation

The Federal Reserve raised its benchmark interest rate on Wednesday for the first time in more than three years, as policymakers moved to confront persistent inflation fueled largely by rising energy costs.

The Federal Open Market Committee (FOMC) voted unanimously, 12-0, to raise the federal funds rate by 25 basis points, lifting it from a range of 3.5%-3.75% to a new target range of 3.75%-4%. The rate had been held at 3.5%-3.75% since a cut in December 2025.

In its post-meeting statement, the committee said "inflation remains elevated," while noting that "uncertainty remains elevated owing, in part, to geopolitical developments."

The decision comes as inflation has been driven up by higher oil prices linked to the ongoing war between the US and Iran, which has disrupted global energy markets since fighting began earlier this year. Even as headline inflation had shown signs of cooling into the summer, with CPI easing to 3.4% in July, Fed Chair Kevin Warsh had signaled a hawkish stance at the Jackson Hole symposium in late August, pointing to underlying inflation measures still running well above the Fed's 2% target.

Speaking after the decision, Warsh said the rate hike reflected the Fed's dual mandate to maintain price stability and support full employment, adding that the committee "will deliver price stability."

Alongside the rate decision, the Fed released updated economic projections showing policymakers expect at least one more 25-basis-point hike before the end of the year, with additional meetings scheduled for October and December. The committee also lowered its unemployment forecast to 4.1%, down from its June projection, pointing to a labor market that has remained more resilient than expected despite the rate increase.

Officials remain wary that prolonged high energy prices could push inflation expectations higher and spread more broadly through the economy, a key factor behind the decision to act now rather than continue looking past the current bout of inflation.