The Federal Reserve raised its benchmark interest rate by a quarter percentage point Wednesday, bringing the federal funds target range to 3.75% to 4% as policymakers seek to bring persistent inflation back toward the central bank’s 2% target.
The Federal Open Market Committee approved the increase in a unanimous 12-0 vote. It is the Fed’s first rate hike since 2023.
Fed Points to Elevated Inflation
The Fed said economic activity continues to expand at a solid pace, with resilient domestic spending, strong productivity growth and robust capital investment.
Job gains have kept pace with the workforce, while the unemployment rate has changed little, according to the central bank.
At the same time, the Fed said inflation remains elevated. The committee said Wednesday’s increase is intended to support a return to its 2% inflation goal.
Consumer prices increased 3.4% in August from a year earlier, while prices rose 0.4% from July, according to recent government data.
Borrowing Costs Could Rise
Higher interest rates generally make borrowing more expensive for consumers and businesses.
The increase can affect credit cards, auto loans, and other forms of borrowing. Mortgage rates are not directly determined by the federal funds rate, but they have also been elevated as longer-term Treasury yields have risen.
The average 30-year mortgage rate recently reached 6.76%, according to Freddie Mac data.
Consumers who already have fixed-rate mortgages generally will not see their existing monthly payments change because of the Fed’s decision.
Savers Could Benefit From Higher Rates
While borrowers face higher costs, savers can benefit when banks raise the rates they pay on savings accounts and certificates of deposit.
The immediate effect of a quarter-point increase can be relatively limited for individual households. A larger impact would occur if additional rate increases follow and borrowing costs remain elevated for an extended period.
Fed Signals Another Possible Increase
The rate decision comes as the Fed weighs continued inflation against economic growth and elevated uncertainty related in part to geopolitical developments.
Fed officials said domestic spending remains resilient and productivity and capital investment are strong, while acknowledging that uncertainty remains elevated.
