Arya News - The unanimous decision underscores the central bank’s commitment to lowering prices that have remained stubbornly high.
For the first time in more than three years, the United States Federal Reserve has raised interest rates amid mounting inflationary pressures and consumer frustration.
The unanimous decision on Wednesday, supported by all 12 members of the Federal Open Market Committee (FOMC), raised rates by a quarter of a percentage point, underscoring the central bank’s commitment to lowering prices.
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“The plain fact is that inflation is too high and has been for too long,” US Federal Reserve Chair Kevin Warsh told reporters.
Here’s what you need to know:
Why did this happen?
The US Fed has a dual mandate of maximising employment and stabilising prices, maintaining a 2 percent inflation target.
After soaring for years during the COVID-19 pandemic, inflation had finally started to taper closer to target. But over the last several years it has been on the upswing once again and hit 3.4 percent last month.
That comes on the back of tariffs unleashed by President Donald Trump on most trading partners, as well as by the US war in Iran and increased spending on artificial intelligence.
The Fed said Wednesday’s rate increase “will support a timelier return to the Committee’s 2 percent goal”.
What impact will this have?
The rate hike has a litany of possible economic and political ramifications.
The increase will hit any US consumer who is paying interest on credit card debt. It will also make it even more expensive for those who hope to borrow for homes, automobiles and other expensive purchases.
When the Fed raises the cost of borrowing it also reduces demand for items, which could impact US businesses and risk the health of the economy.
The rate increase also comes at an inopportune time for Trump and the Republican Party, less than 50 days before the November midterm elections that will determine whether Republicans or Democrats control the US Congress.
US consumers have faced years of increasingly higher prices, most recently at the gas pump with the average price for a gallon of petrol hitting $4.36 ($1.15 per litre), up 14 cents in the past week and up from $3.18 a year ago, according to the American Automobile Association (AAA). Voters could opt to vent their frustrations at the ballot box, offering Democrats a chance to seize one – or even both – chambers.
How soon will this translate to higher prices?
US banks looking to borrow money from the Fed will immediately start paying the higher lending rate.
Consumers with credit cards, which generally have variable interest rates that closely follow the prime rate that banks charge their customers, could see their minimum payments increase within a month, as could home owners with variable interest rate mortgages.
What did Trump say?
The decision is a blow for Trump, who has frequently clashed with the Fed over lowering borrowing costs. Trump mounted a pressure campaign against the Fed’s previous chairman, Jerome Powell, over his resistance to doing so.
When Powell’s term ended earlier this year, Trump handpicked his successor, Kevin Warsh, who was placed in the job in May.
At the time, Trump said he would choose someone who supported lower interest rates.
On Sunday during a trip to Ireland, Trump said the US “should be paying the lowest interest rate in the world” after previously threatening to cut off a large section of US trade if rates did not decrease.
On Wednesday, Warsh was asked what his message for Trump was about the rate hike.
“I’ve got nothing for you on a discussion with the president,” he replied.
Nearly three hours after the interest rate decision was announced, Trump lashed out.
“Interest Rates in the United States should be 1%, or less, because we are the Best Credit in the World — BY FAR,” he wrote on his Truth Social platform. “We are “carrying” almost every country in the World, and that cannot go on any longer. LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!”
Fed members indicated on Wednesday that there would likely be another quarter-point increase this year and those rates would remain unchanged through 2027.