The Federal Reserve on Wednesday did what only a few weeks ago seemed unthinkable: It raised its key interest rate.
There are two important ways to look at the unanimous decision by the Federal Open Market Committee, the Fed’s rate-setting panel, to raise the target rate a quarter-point to 3.75 percent to 4 percent.
The increase, the first in more than three years, is a sharp reminder of how much the American economy has weakened in the past year, and it’s a signal to consumers that the central bank is actively trying to stabilize prices.
The present fragile state of the economy was largely unexpected at the end of 2025. The FOMC reduced the rates in December. At the time, then-Chairman Jerome Powell, and for that matter much of the financial world, was cautiously optimistic that more cuts were to come in 2026.
Yes, Powell said, the rate of inflation remained above the Fed’s 2 percent target. But he saw the higher prices as partly a result of President Trump’s tariffs, increases expected to have less of an effect later in 2026. The Fed predicted that Personal Consumption Expenditures, its preferred metric for measuring inflation, would increase 2.4 percent this year.
Instead, the rate of inflation has remained consistently above 3 percent, and the July year-over-year reading was 3.7 percent.
The Fed acts
“Economic activity is expanding at a solid pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient,” said a statement from the Federal Open Market Committee on Wednesday.
It cited progress in some parts of the economy.
“Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little,” the FOMC stated, pointing to last month’s 4.1 percent unemployment rate.
But, the committee noted: “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.”
Federal Reserve Chair Kevin Warsh told a news conference that “trends matter.” Since the last FOMC meeting in July, he said that while the economy remained largely stable, the geopolitical situation remained volatile.
“There’s no hiding from hot spots around the world,” he said.
There were also indications Wednesday from projections by some FOMC members that there could be another rate increase this year.
While few experts envision a recession, stubborn inflation is clearly having an impact on consumers, whose spending habits drive much of the economy.
Gasoline and diesel prices remain well above 2025 levels, thanks largely to the Iran war and other international conflicts. The nonpartisan Conference Board’s monthly survey of consumer sentiment found consumers in August increasingly pessimistic.
The meaning for consumers
Historically, interest rates are the government’s main tool to cool price increases, as higher rates are supposed to motivate consumers to spend less. Lowering demand should cause prices to drop.
Higher rates come with good and bad news for consumers, said Matt Schulz, chief consumer-finance analyst at LendingTree, which tracks interest rates.
“It’s a great time to shop for an online high-yield savings account, CD or money market account,” Schulz said. “Returns aren’t at the record levels of a couple of years ago, but they’re still strong by historical standards. A rate hike could push some savings yields higher, although banks may not raise rates immediately or by the full amount of the Fed’s increase.”
On the other hand, most credit-card holders should anticipate their annual percentage rates to increase by a quarter-point in the next few months.
“One increase may only add a dollar or two to many borrowers’ monthly bills, but every dollar matters when you’re already struggling with debt,” Schulz said. “Credit card APRs are already high, so this rate hike would make an already difficult situation more challenging.”
Another potential problem: Mortgage rates are unlikely to be impacted much. They are driven by several factors, notably bond markets.
Those markets have been pushing longer-term rates up lately as they continue to reflect concerns about inflation. The average rate on a 30-year mortgage loan last week was 6.76 percent, according to Freddie Mac, which monitors rates.
Whether Wednesday’s action will ease those fears is unclear. But much of that concern is the result of uncertainty about how the government will deal with the federal debt, now over $40 trillion.
Congress has no plan to deal with the debt until at least November, and even then it’s doubtful the fiscal crisis will get much attention during what is likely to be a quick lame-duck session.
Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget, summed up the near future this way: “High debt is driving up interest rates, and high interest rates are driving up the debt.”
In short, MacGuineas said: “The era of low interest rates is long over.”
