Fed Hikes Interest Rates for First Time in 3 Years—Unanimous Decision Comes in Defiance of Trump

Federal Reserve policymakers have raised the benchmark interest rate for the first time in three years in response to pernicious inflation, defying President Donald Trump's insistent calls for lower borrowing costs.

Fed Chairman Kevin Warsh joined the 12-0 majority on the Federal Open Market Committee on Wednesday, voting unanimously to raise the federal funds rate by a quarter percentage point. The move brings the overnight rate to a range of 3.75% to 4.00%, its highest level since last fall.

"The plain fact is that inflation is too high and has been for too long," Warsh said at a press conference following the vote. "The committee’s unanimous vote shows our resolve to achieve price stability on a timelier basis."

The decision marks a stunning reversal in outlook for the central bank, which as recently as March had been expected to cut interest rates this year. But soaring energy prices, fueled by the disruption in oil trade during Trump's war with Iran, have left Fed policymakers faced with a new inflation crisis.

Markets now expect the Fed to raise rates again once more before the end of the year. Mortgage rates have already risen sharply in anticipation of the policy change, climbing quickly toward 7% this month after hitting a three-year low of 5.98% in late February.

The rate hike may put Warsh in the crosshairs of Trump, who has persistently called for lower rates and publicly clashed with former Fed Chair Jerome Powell over rate policy.

In a post on his Truth Social site following the FOMC vote, Trump slammed the decision without attacking Warsh directly, and reiterated his threat to halt most international trade if the Fed doesn't dramatically lower rates.

"Interest Rates in the United States should be 1%, or less, because we are the Best Credit in the World — BY FAR," he wrote. "If we stopped Trading with every country that we have a Deficit with, which is most of them, we would make, at least, 1.5 Trillion Dollars a year. The word “Deficit” is nothing more than a fancy word for LOSS. We are “carrying” almost every country in the World, and that cannot go on any longer."

Trump had previously threatened to halt trade with countries that have a trade surplus with with U.S. if the Fed didn't slash rates, a proposal that many economists criticized as extreme and misguided.

Warsh, handpicked by Trump to lead the central bank, had also called for lower rates before starting the job in May. But Warsh has faced mounting concerns from colleagues on the FOMC that inflation could again spiral out of control if monetary policy isn't tightened.

At the July meeting of the FOMC, when the majority voted to leave rates unchanged, three "hawkish" members dissented in favor of a rate increase. Now, the 12-member panel is unanimous in supporting a hike as the inflation threat looms.

"Price stability is foundational to economic growth, and I think we took an important step today to deliver it. We did it in part by removing the dose of accommodation that I mentioned before," Warsh said.

The Fed uses higher interest rates to fight inflation and lower rates to stimulate the job market, in line with the central bank's mandate of maintaining price stability and maximum employment. The Fed doesn't directly set mortgage rates, which instead move in response to the bond market.

In recent weeks, the bond market has been beset by turmoil, with the yield on the key 10-year Treasury surging above 5% to nearly a 20-year high. That move reflects investor fears about inflation, growing federal deficits, and concerns about the Warsh Fed's willingness to defy Trump and raise rates if necessary.

Warsh insisted that the decision to raise rates was not in response to the alarm bells in bond markets.

"We made this decision today based on our assessment of the situation, based on our assessment of the trajectory for employment, based on our judgment on the strength of the economy. Sometimes the market tries to prejudge our outcomes," he said. "I'll observe market prices and see what they have to say. But today was our decision."

The 10-year Treasury yield is a key benchmark for mortgage rates, as the typical 30-year home loan is typically refinanced or closed through a home sale at around the 10-year mark. And mortgage rates show no sign of easing after hitting a 15-month high last month.

Mortgage rates averaged 6.76% last week, according to Freddie Mac. That's the highest in 15 months, and rising rates have already put a dent in home sales for August, the latest data shows.

Existing-home sales plunged to a 14-month low in August, dipping below 4 million annualized for the first time since June 2025. And pending sales also retreated last month, snapping an eight-month growth streak, Realtor.com data shows.

"The pressure on mortgage rates was here even before the Fed rate hike, and it doesn’t show signs of relenting," says Realtor.com Chief Economist Danielle Hale. "The higher rate environment is a marked contrast to fall 2025, when rates dropped below 6.5%, and likely means less year-over-year momentum in home sales in the last quarter of 2026."

'Dot plot' forecast shows higher rates through 2027

The FOMC on Wednesday also released its quarterly summary of economic projections, which includes member forecasts on future conditions and rate policy.

That includes the "dot plot" chart, which shows the anonymous projections of the 19 total members of the panel, including seven nonvoting participants. (Warsh abstained from including his forecast in the dot plot, saying "my business is not to give forward guidance.")

The dot plot shows overwhelming expectations on the FOMC that the Fed will raise rates again this year, with 12 participants projecting one additional quarter-point rate hike, and four participants penciling in two hikes.

The median FOMC participant expects the federal funds rate to remain above 4%, which is higher than its current level, by the end of 2027, indicating tighter conditions may remain for some time.

By the end of 2028, the median participant expects the Fed rate to sit at a range of 3.75% to 4.00%, the same level it reached after Wednesday's vote.

"With the Fed shying away from forward guidance, markets may read into the economic projections even more than usual for clues about the range of outlooks on the FOMC and, importantly, their reaction functions," says Hale.