The Federal Reserve announced on Wednesday (September 16) that it would raise its benchmark overnight interest rate by 25 basis points to a range of 3.75% to 4.00%. This is the Fed's first rate hike in three years and the first policy shift since new Chairman Warsh took office. The decision was unanimously passed and hinted at the possibility of further tightening of monetary policy in the coming months. The latest forecasts show that the policy rate will be in the range of 4.00% to 4.25% by the end of 2026 and 2027. This decision essentially acknowledges that the Trump administration has so far failed to control inflation, and policymakers are concerned that inflation may worsen further. Trump quickly responded, reiterating that US interest rates should be significantly reduced to 1% or even lower. In the market, the dollar index surged 0.7% to a one-month high, non-US currencies generally weakened, gold prices hit a more than one-month low, the 2-year US Treasury yield soared to its highest level in more than two years, and the interest rate futures market reflected a probability of about 90% for another rate hike before the end of the year. A triple game surrounding inflation, politics, and market expectations has thus entered a new phase.

Inflation rages on: Tariffs, war, and the AI boom exert pressure from all sides.

Despite Trump's promise to lower prices during his term, global import tariffs, the energy shock from the US-Israel war on Iran, and capital spending driven by the artificial intelligence boom have combined to keep price pressures high. The Federal Reserve therefore believes it is necessary to raise the benchmark overnight rate by a quarter of a percentage point to a range of 3.75%–4.00%. The latest updated quarterly economic projections show that 16 of the 18 policymakers expect at least another quarter of a percentage point rate hike by the end of the year, with only two expecting rates to remain unchanged. With the exception of one, the remaining policymakers indicated upside risks to inflation and no longer attributed them primarily to one-off supply shocks. Warsh again did not submit interest rate or other economic projections. He attributed the need for tighter monetary policy in part to faster economic growth, arguing that strong economic and employment growth is exacerbating inflationary pressures that no longer seem solely attributable to oil prices or import tariffs. In listing his reasons for supporting the rate hike, Warsh stated that a range of data, including those from the labor market, indicates a strengthening economy, resilient domestic consumption, strong productivity growth, and robust capital investment. Previously, he had advocated keeping interest rates unchanged at the Federal Reserve meeting on July 28-29. This rate hike is not only the first in three years, but also the first policy shift since the new Fed chairman took office. Warsh was appointed by Trump in late May, and at the time, it was widely expected that he would push for rate cuts.

Resolutions and Forecasts: A Higher and Longer Interest Rate Path

The Federal Open Market Committee (FOMC) of the Federal Reserve released a policy statement after a two-day meeting, stating that inflation remains high and today's policy moves will help bring the Fed back to its 2% inflation target more promptly. Fed Chair Warsh called the rate hike "the right decision" at the post-meeting press conference. He said he found it difficult to describe overall financial conditions as tight, but this view was widely shared within the committee, hence the Fed tightened some of its accommodative policies. The policy statement and projections indicate that the policy rate will rise to a range of 4.00%–4.25% by the end of this year and remain at the same level until the end of 2027. Fed policymakers raised their inflation expectations, measured by the personal consumption expenditures price index, to 3.7%, up from 3.6% projected at the June meeting. Inflation is expected to return to the 2% target by 2029, a year later than previously anticipated. Economic growth was slightly revised upward to 2.3% from 2.2%, while the unemployment rate is projected to fall to 4.1% by the end of the year, down from 4.3% projected in June. Notably, the policy statement removed previous statements attributing current high inflation to "supply shocks," particularly in the energy sector. This reflects concerns among policymakers, including Warsh, that current price pressures are too broad and unsettling. This rate hike comes less than two months before the midterm elections, which will determine whether Trump's Republican Party can retain control of Congress for the final two years of his presidency. Facing voter anger over gasoline prices rising by about a third compared to a year ago and the continued climb in mortgage rates this year, the Republicans are facing a tough election campaign. The average interest rate on a 30-year fixed-rate mortgage is approaching 7%.

Warsh's debut and its market repercussions: Bond market leads, dollar strengthens.

Following the release of the Federal Reserve's policy statement and economic projections, the US dollar index fluctuated upwards by 0.7%, recording its largest single-day gain in nearly three months and reaching a more than one-month high of 100.35. Non-US currencies generally fell, and spot gold reversed its gains, falling more than $100 from its intraday high, hitting a low of $4235.10 per ounce, a new low since August 7th. Meanwhile, the yield on 2-year US Treasury bonds, which is heavily influenced by expectations of Fed policy rates, surged to its highest level in more than two years. At the same time, long-term bond yields remained stable, and the yield curve flattened, indicating that the market initially expressed confidence that Warsh was finally delivering on his long-standing promise to achieve price stability. Warsh had previously referred to inflation as a central bank's "choice." In a brief press conference, typically about 15 minutes shorter than during his predecessors' tenures, Warsh highlighted emerging evidence that convinced him that inflation could not be alleviated quickly enough without tighter monetary policy. This directly refuted government officials' claims that "inflation is no longer a problem" or that "inflation will fall back on its own over time." Sima Shah, chief global strategist at Principal Asset Management in London, said the Federal Reserve has finally begun its rate hike cycle, and the focus of discussion has now shifted from "whether rates will be raised again" to "how many more times will rates be raised." She believes the unanimous vote indicates that rising energy prices and persistent inflation have even swayed doves, making a "one-time rate hike" highly unlikely. In fact, according to the CME Group's FedWatch tool, the interest rate futures market reflects a roughly 90% probability of the Fed raising rates by another 0.25 percentage points before the end of this year.

Trump's indirect attack: Political pressure and the White House game

Trump reacted swiftly, reiterating his consistent call since returning to the White House in January 2025: U.S. interest rates should be drastically lowered to a level potentially as low as 1%. This level is typically associated with measures taken by the Federal Reserve to help the economy recover from a crisis, and in normal times, it could trigger inflation. On his "Truth Social" platform, Trump stated that U.S. interest rates should be lowered to 1% or lower because the U.S. is the world's most creditworthy country, by a wide margin; the U.S. is thriving due to new investment; if trade with all countries with which the U.S. has a trade deficit was stopped, the U.S. could earn at least $1.5 trillion annually; the term "trade deficit" is merely a fancy way of saying "loss," therefore U.S. interest rates should be lowered, and quickly. While Trump did not name Warsh, his wording was reminiscent of the president's previous sharp criticisms of former Federal Reserve Chairman Jerome Powell. The president's reaction underscores the significance of the Fed's actions under Warsh's leadership on Wednesday.

Analysts believe that interest rate hikes are not the end; the key lies in the subsequent path forward.

Justin Greenhill, chief investment officer at Sollinda Capital Management, pointed out that the fixed-income derivatives market had previously anticipated a greater than 90% probability of a 25 basis point rate hike at this Federal Reserve meeting, making the hike far from unexpected. The press conference released a clearly hawkish signal, which may curb the recent rise in long-term Treasury yields, at least in the short term. How this will affect the stock market is less clear, but small-cap stocks may underperform mega-cap stocks as financial conditions tighten in the future. Michael Gapen, chief U.S. economist at Morgan Stanley, stated that the Fed's 25 basis point increase in the policy rate range to 3.75%–4.0%, along with the dot plot showing policymakers' median forecast of another rate hike this year, unchanged rates in 2027, and a rate cut in 2028, and the addition of the statement that "today's policy actions will help push inflation back down more promptly," indicates that the Fed acknowledges that inflation is slowing recently but hopes to accelerate this process. In its summary of economic projections, the Federal Reserve raised its inflation forecasts for this year and 2028 by 0.1 percentage points each, but the projections still indicate that the Fed believes inflation will decline next year, requiring a higher policy rate to achieve this. Karen Manna, fixed-income strategist at Federated Hermes, believes the bond market has already reacted to today's rate hike. This action confirms that policymakers remain concerned about inflation, and the voting results show that the committee, like Chairman Warsh, believes urgent action is needed. U.S. Treasury yields have risen sharply as investors reassess inflation risks and the prospect of interest rates remaining high for a longer period. In many ways, the bond market is leading the Fed, not the other way around. Therefore, today's 25-basis-point rate hike is not as significant as the direction of subsequent policy. The market has largely priced in policy tightening, but more crucially, the question remains whether the Fed considers this action sufficient or will continue to act.

Conclusion: The triple game between inflation, politics, and the market is far from over.

Overall, the Fed's first rate hike in three years is not merely a technical response to inflation data, but a tough choice made amidst a confluence of tariffs, energy shocks, AI capital spending, accelerating economic growth, and political pressure. Warsh, in his debut with a unanimous vote and hawkish statements, attempted to demonstrate to the market that the Fed would bring inflation back to its 2% target; Trump, meanwhile, continued to pressure for significant rate cuts. The market has already reacted with a stronger dollar, soaring short-term bond yields, and a flattening yield curve, and the high probability of another rate hike before the end of the year means the battle over the interest rate path is far from over. For investors, the key is no longer whether there will be a rate hike this time, but whether the Fed is willing to continue tightening under political and market pressure until inflation truly falls "more promptly."