Fed raises rates by 25 bps to combat inflation

Key facts

• The Federal Reserve raised its policy rate by 25 basis points.
• Fed Chair Kevin Warsh described the rate hike as removing a 'dose' of accommodation.
• The Fed's stated goal for the action is to support a 'timelier return to the Committee’s 2 percent goal'.
• Core PCE inflation is currently running above a 3% annual pace.
• Headline inflation has risen due to higher energy prices.
• The FOMC statement indicated that September's rate hike will likely be followed by another hike this year.

The Federal Reserve implemented a 25 basis point interest rate hike at its September meeting, aligning with consensus expectations. Fed Chair Kevin Warsh characterized the move as a necessary step to combat inflation that has persisted above the central bank's 2% target. He described the action as removing a "dose" of accommodation to achieve a timelier return to price stability.

While some underlying inflation measures have shown moderation, the Fed's preferred gauge, core Personal Consumption Expenditures (PCE), has reaccelerated and is currently above a 3% annual pace. Headline inflation has also seen an increase, partly due to elevated and volatile energy prices influenced by geopolitical tensions.

The Federal Open Market Committee (FOMC) also released updated forecasts in its Summary of Economic Projections (SEP), signaling that further rate increases are likely this year and potentially in 2027 if inflation does not moderate quickly. The Fed's decision appears to be a response to slower-than-desired progress in bringing inflation down, influenced by supply shocks and demand-side factors. The European Central Bank also recently raised its policy rate, reflecting a broader trend among central banks to maintain inflation-fighting credibility.