On 16 September, the Federal Reserve announced an increase of 25 basis points to 3.75 per cent to 4.00 per cent in the target interest zone of the Federal Fund, the first such increase since July 2023, and the first major policy decision taken by the new Chairman, Kevin Walsh. The Federal Open Market Commission (FOMC) adopted the resolution by 12 votes in favour, none against and the new interest rate came into effect on 17 September.
After raising interest rates to 5.25 per cent – 5.5 per cent in July 2023, the Federal Reserve gradually reduced interest rates in 2024 and 2025 and maintained interest rates at 3.5 per cent – 3.75 per cent between December 2025 and July 2026. However, this moratorium has become increasingly difficult to sustain — energy costs continue to push up prices and inflationary pressures have re-emerged.
Core data illustrate the seriousness of the problem: the Federal Reserve's preferred inflation indicator, the Personal Consumer Expenditure Price Index (PCE), remained at 3.7 per cent in June and July, with a core inflation rate of 3.3 per cent. The core inflation rate was 3 per cent before the Iranian war pushed fuel prices up. The consumer price index averaged 3.4 per cent in August, but the ring ratio rose by 0.4 per cent, the largest single-month increase since May, indicating that the energy shock was transmitting to the economy as a whole. Inflation has been higher than the Federal Reserve target of 2 per cent for more than five consecutive years.
Walsh was appointed by President Trump, but this increase has created a direct contradiction with the White House. - Trump's been demanding a cut for months. Walsh made it clear at the press conference: "Inflation is too high, and it has been too high for too long." He stressed that "too many categories continue to show increases of more than 3 per cent over the six-month and 12-month cycles" and pointed out that "underlying confidence has yet to be built in moving towards the target."
It is noteworthy that, at the July meeting, the Chairman of the Cleveland Federal Reserve, Beth Hamaker, the Chairman of the Minneapolis Federal Reserve, Neil Kashkali, and the Chairman of the Dallas Federal Reserve, Loretta Logan, voted in favour of the increase in interest rates, the largest single meeting since 2016. The unanimous vote meant that the Commission, after weighing the pressures of the White House interest rate reduction against the demands of some officials, had chosen the intermediate route — neither extreme austerity nor laxity.
The increase in interest rates is immediately transmitted to several fields:
Savings and borrowing: The Federal Reserve adjusted several management interest rates simultaneously — 3.90 per cent for reserve balances, 4.00 per cent for discount window main credit, 4.00 per cent for standing buy-back operations and 3.75 per cent (up to $160 billion per day per counterparty). Seven regional reserve banks applied for an increase in the discount rate.
Credit card holders: according to media reports, higher interest rates will apply to current balances and future additional consumption, and for consumers holding credit card balances, the monthly bill may increase by only "one or two dollars" — a single interest rate increase of a limited amount, but the multiplier effect cannot be ignored.
Young and low-income families: It was noted that interest rate hikes were more pronounced on young and low-income families, as these groups were more sensitive to the cost of borrowing and lacked sufficient savings buffers. The interest rate is described as a "a blunt instrument" that affects all borrowers indiscriminately.
Owners and home buyers: Increased interest rates mean higher mortgage costs, and the purchase threshold is further raised at the current house price level.
The Federal Reserve's interest-point array released a clear Eagle signal: Of the 18 officials who submitted projections, 12 are expected to have an additional 25 basis points increase by the end of the year (at a rate of 4.125 per cent), while 4 are expected to increase their interest rates cumulatively by 50 basis points to 4.37 per cent, with only 2 holding interest rates unchanged. The median interest rate at the end of 2026 is forecast to be 4.1 per cent above the current midpoint.
In the longer term, 14 officials expected interest rates to be higher than the current level by the end of 2027, with the median rate forecast for 2028 being 3.9 per cent higher than the 3.4 per cent previously expected. This means that Fed officials generally believe that the high interest rate environment will last for several years.
The next Federal Reserve policy meeting is scheduled for 27-28 October. Before doing so, the market needs to focus on the soon-to-be-published inflation and employment data — they will decide whether the “additional rate hike” will land before the end of the year.
This increase marks a fundamental shift in the direction of the Fed’s policy: from a consecutive decline in interest rates in 2025 to a renewed tightening. The result of the vote, the short and strong language of the statement, and the sustained interest rate hike shown in the schematic chart, together send a clear signal that the Fed is determined to fight inflation, even if it means that it is contrary to the White House’s position. For ordinary consumers, the era of rising borrowing costs has come; for investors, the high interest rate environment may be more durable than previously expected.