The Federal Reserve raised US interest rates by a quarter percentage point on Wednesday for the first time since July 2023, reversing a three-year easing cycle because inflation, fuelled by the Iran conflict and the AI investment boom, refuses to return to target.
The decision lifted the federal funds target range to 3.75 to 4 per cent and was unanimous across the committee, including the new Fed chair Kevin Warsh, whose appointment had been premised on looser money. In its statement the committee said the hike would “support a timelier return to the committee’s 2 per cent goal”. Quarterly projections show officials expect one more increase before the end of 2026, with rates seen holding near 4.25 per cent through 2027, Reuters reports.
The inflation picture forced the hand. US consumer prices rose at an annual rate of 3.4 per cent in August, well above target, as tariffs on imports, an energy shock following the outbreak of war with Iran in February, and heavy capital spending on data centres kept price pressure intense. President Trump, who installed Warsh expecting cheaper money, had promised lower prices on his watch; the hike is a public acknowledgement that he cannot deliver them through the Fed.
For British households the read-across is uncomfortable but real. The Fed sets the floor for global borrowing costs, and gilt yields have been climbing in sympathy ahead of the October Budget. The Bank of England meets later this month facing its own fuel-driven inflation bump, with CPI back at 3.1 per cent.
Corporate treasurers now plan for a world where the cheap-money tailwind of 2025 and early 2026 is over. Dollar borrowing costs more, hedged dollar debt costs more, and emerging-market issuers that refinanced into dollars will roll at worse terms. Equity markets took the decision quietly; the hike was widely priced, and the message investors cared about was the dot-plot, which said the tightening is not finished.
The next US meeting lands in late October, one week after the UK Budget. Finance ministries on both sides of the Atlantic will be reading the same tea leaves: whether oil from the Gulf, tariff pass-through, and AI capex keep core inflation stuck above three per cent. If they do, Warsh will have to keep hiking into a White House that chose him to do the opposite.
