Fed Raises Rates to 4% in First Hike Since 2023

The latest:

The US central bank raised interest rates by 25 basis points to 4%, matching market expectations and ending five straight meetings without a policy change. It is the first hike since July 2023 and the first substantive shift under Kevin Warsh, who took office on 22 May. Markets had priced a 92% probability of the move earlier in the day.

Details:

• The decision: The Federal Reserve moved its benchmark rate from 3.75% to 4%. It follows the 29 July meeting, when the rate was held for a fifth consecutive time after a December 2025 cut of the same size that had been the third in a row.
• Warsh’s framing: Warsh pointed to the labour market as the source of strength, noting unemployment held near 4.1% while job openings and average weekly hours increased. He said wage growth has slowed and workers have lost leverage, aligning with officials’ view that employment is not driving inflation.
• The Powell record: Since the last increase in July 2023, the Fed cut rates six times by 25 basis points each under former chair Jerome Powell, a total of 125 basis points, taking the benchmark from 5.25% to 3.75% before Wednesday’s decision.
• The inflation trigger: Renewed price pressure came from energy. The 2% annual target has been breached for five years, August consumer price figures came in above expectations, and global oil prices rose 15% this month on disrupted Middle East supply flows, according to The New York Times.
• Wall Street revision: Morgan Stanley economists wrote on Monday that they had shifted from forecasting no hikes this year to two, citing Warsh’s public remarks, the rise in oil prices, inflationary pressure from expanding artificial intelligence investment, and market repricing toward tightening.
• Why tighten now: Terry Wizman, global fixed income and rates strategist at Macquarie, said the pain consumers feel on mortgage, car and student loan payments is the intended effect, because rate increases are designed specifically to discourage spending.
• The economy holding up: Americans spent $36 billion more in July than the previous month, according to the Bureau of Economic Analysis personal spending report. Business investment is expanding on expectations that AI returns will exceed borrowing costs, and the S&P 500 is up about 11% year to date.
• The K-shaped split: Leslie Falconio, head of fixed income strategy at UBS Global Wealth Management, said the upper track of the K-shaped economy has been driving growth. Analysts studying Bank of America card data said lower-income spending has risen disproportionately in recent months, narrowing the gap.
• Housing feels it: Housing is the one sector retreating, with home sales falling as mortgage rates topped 6.7% for the first time since July 2025. Many owners who locked in lower rates years ago have been shielded from the increase.
• Bond market reaction: The two-year Treasury yield rose to 4.66%, its highest since 2024, while the 10-year yield, which sets the pace for most consumer loans, passed 5% this week for the first time since 2023.

Between the lines:

Falconio argued the hike could paradoxically pull long-term yields lower by signalling pre-emptive inflation management, prompting investors to demand less compensation on government debt. She tied that outcome to the number of future increases: if growth stays strong and the Fed hikes five or six times, long rates will not fall.

What’s next

The Fed’s December meeting is the next decision point, with Morgan Stanley forecasting a second increase there. Watch September consumer price data, oil prices, and whether the 10-year yield holds above 5%.