September 16, 2026, 3:25 PM ET
| 4 minutes read
The Federal Reserve is raising its benchmark interest rate for the first time in three years in a bid to stem persistent inflation after months of war-related spikes in energy and food prices.
The rise from 3.75% to 4% was widely expected in financial markets. Kevin Warsh New Fed Chairman chosen by President Donald Trumpsaid last month that it hoped inflation would fall “sufficiently fast” after previously signaling a neutral position. The Federal Reserve’s short-term lending rate affects borrowing costs in the United States and across global markets and is one of the primary instruments used to target inflation and support full employment.
The decision by the 12-member Federal Open Market Committee, chaired by Warsh, is a test of its credibility as an independent body in the face of political and legal attacks from President Trump. Mr. Warsh’s campaign to unseat his predecessor, Jerome Powell, has raised concerns about the Fed’s independence and its intention to take potentially politically damaging steps, such as raising interest rates, ahead of this year’s midterm elections. Mr. Trump has repeatedly called for lower interest rates to boost economic growth and criticized Mr. Powell’s record.
But the economic fallout from the disruption in energy shipments caused by Trump’s unpopular war with Iran made it difficult to justify the rate cuts. Diesel prices are over $6 per gallonhitting record highs and driving up costs for transportation, agriculture and many industries. Fuel prices are a major hindrance to Republicans’ chances of retaining control of Congress. In nearly every poll, concerns about price and affordability are at the top of voters’ list of priorities.
“Higher oil prices are definitely weighing on everything,” said Mickey Levy, former chief economist at Bank of America and now a visiting fellow at the Hoover Institution. “It’s amazing how resilient the economy has been.”
This resilience poses a dilemma for the Fed. The Fed wants the labor market to remain strong and employers to continue hiring. War-related energy shocks may be temporary. But runaway inflation could hurt the economy even more, especially if the Fed has to raise rates higher than usual in the future.
“The labor side of the Fed’s congressional powers is in good shape, and yet inflation has been above target for more than five years,” Warsh said at a news conference in Washington after announcing the rate hike. “The plain fact is that inflation is too high and has remained that way for too long.”
But even before the Fed raised its benchmark rate, commercial interest rates were already higher due to rising global bond yields. The yield on the 10-year US Treasury note, one of the most traded financial assets in the world, is This week it rose to its highest level since 2007.. Investors typically demand higher returns on long-term bonds to compensate for the risk of rising inflation. This time, drive up the cost of mortgages and other types of consumer debt.
Not all of the upward pressure on interest rates is coming from the oil and gas turmoil in the Middle East. A flood of bonds issued by tech companies investing in artificial intelligence is also pushing up global bond yields, which move in the opposite direction of bond prices. The AI boom is another reason the U.S. economy is overheating, and a factor in the Fed’s decisions about when inflationary pressures will ease.
Mr. Powell’s FOMC cut benchmark interest rates three times last year in response to what appeared to be a weakening labor market. At the time, Mr. Warsh was among those who criticized the Fed for taking its foot off the brakes on inflation. The cut has come Amid the public spat between Trump and Powell. The president threatened to prosecute him for fraud. Mr. Trump also attempted to fire Federal Reserve Board Director Lisa Cook, and the Supreme Court ruled against the firing.
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This battle with Mr. Powell, who resigned as chairman in May but remained on the Fed’s board, set the stage for today’s interest rate decisions under Mr. Warsh. Analysts are focused on whether this rate hike is a one-time rate hike or part of a tightening cycle, which is a pattern in the past. Financial markets were already pricing in at least two interest rate hikes in 2026.
But that’s not a given, says economist Michael Strain of the right-wing American Enterprise Institute. “If Chairman Warsh is looking for an opportunity to show the market that the Fed is different than its recent predecessors, this is it,” he wrote in X ahead of Wednesday’s announcement.