The US Federal Reserve has raised interest rates by a quarter of a percentage point, its first increase in more than three years, as persistent inflation and soaring fuel prices continue to weigh on the economy.
The central bank said on Wednesday that its benchmark rate would move to a range of 3.75% to 4%. The decision comes weeks before the US midterm elections and despite repeated calls from President Donald Trump for borrowing costs to be reduced.
In a statement, the Fed said economic activity was expanding “at a solid pace” and that domestic spending had remained resilient, although uncertainty was still elevated partly because of geopolitical developments.
“Inflation remains elevated. Today’s policy action will support a timelier return to the Committee’s 2 percent goal. The Committee will deliver price stability,” it said.
Fed officials expect one further rate increase this year, according to the central bank’s quarterly projections.
Expectations of a rise strengthened sharply in the past week. The CME FedWatch measure had put the probability of a quarter-point increase at 92.3% before the decision, compared with 40% seven days earlier.
Consumer prices rose by 0.4% in August, the biggest monthly increase in four months. Annual inflation stood at 3.4%, matching July’s figure, while the labour market remained healthy.
Fuel costs have added to the pressure. Benchmark crude prices continued to climb as strikes in the conflict involving Iran intensified, with Brent crude trading near $109 a barrel on Tuesday.
The average US petrol price reached $4.36 a gallon, up 14 cents in a week and from $4.06 a month earlier, according to the American Automobile Association. Diesel reached a record average of $6.31, roughly twice its level a year ago, increasing costs for freight and the transport of goods.
Meanwhile, the yield on 10-year US Treasury bonds rose above 5% on Tuesday to 5.02%, its highest level in 19 years. The yield is used as a benchmark for borrowing costs including mortgages and car loans, as well as being closely watched as an indicator of inflation.
Michael Klein, professor of international economic affairs at Tufts University’s Fletcher School and executive editor of EconoFact, said: “The economy is in an unusual place,” with unemployment at a comfortable level while prices remained high and inflation exceeded the Fed’s 2% target.
Mr Klein said there had been “a lot of pressure on Chairman Warsh to raise interest rates because of inflation coming in high”, compounded by concerns over Mr Trump’s demands for lower rates.
He said higher interest rates tended to weaken the economy, but added that the increase may already have been reflected in financial markets. “If the market believes that there’s going to be a rate increase, it’s priced in already as prices move on news, so this won’t be news,” he said.
