WASHINGTON — The Federal Reserve raised interest rates Wednesday for the first time in more than three years, reversing course after a period of rate cuts as policymakers confront inflation that has remained stubbornly above their target.
The Federal Open Market Committee unanimously voted to raise its benchmark federal funds rate by a quarter percentage point, bringing the target range to 3.75% to 4%.
The decision marks the Fed’s first rate increase since 2023 and signals a significant shift in monetary policy. After cutting rates in 2025, policymakers are once again turning to higher borrowing costs in an effort to bring inflation under control.
“Inflation remains elevated,” the Fed said in its statement Wednesday, adding that the rate increase is intended to support a faster return to its 2% inflation target.
The central bank also offered a relatively upbeat assessment of the broader economy, saying economic activity continues to expand at a “solid pace.” Officials pointed to resilient consumer spending, strong productivity and robust capital investment, while noting that unemployment has changed little and job growth has largely kept pace with growth in the labor force.
Inflation changes the Fed’s calculus
The decision underscores the difficult balancing act facing Fed policymakers.
Higher interest rates can help slow inflation by making borrowing more expensive, which can reduce consumer spending and business investment. But keeping rates elevated — or raising them further — also carries the risk of putting additional pressure on sectors already sensitive to borrowing costs, including housing.
Mortgage rates were already moving higher following the decision. The average rate on a 30-year fixed mortgage reached 6.95% as of Sept. 17, according to Freddie Mac, compared with 6.76% a week earlier.
For consumers, the Fed’s move could also contribute to higher borrowing costs on credit cards, auto loans and other forms of variable-rate debt.
The central bank’s latest projections illustrate why officials are willing to accept those risks.
Fed policymakers now project PCE inflation at 3.7% for 2026, slightly higher than the 3.6% projected in June and well above the central bank’s 2% goal. Core PCE inflation, which excludes volatile food and energy prices, is projected at 3.4% this year.
At the same time, officials do not currently project a sharp deterioration in the labor market. Their median forecast puts the unemployment rate at 4.1% at the end of 2026, down from the 4.3% projected in June. They also expect real GDP to grow 2.3% this year.
More rate hikes could be coming
Wednesday’s increase may not be the Fed’s last.
The Fed’s closely watched “dot plot,” which shows individual policymakers’ expectations for interest rates, indicates that most officials believe additional tightening will be appropriate.
The median projection puts the federal funds rate at 4.1% at the end of 2026, compared with the Fed’s previous June projection of 3.8%. Twelve of the 18 officials who submitted forecasts projected a year-end rate midpoint of 4.125%, while four projected 4.375%. Only two projected rates remaining around their current midpoint.
That suggests most policymakers currently expect at least one additional quarter-point increase before the end of the year, although the projections are not commitments and could change as new economic data arrive.
The shift represents a notable turnaround from where monetary policy stood just months ago.
Rather than debating how quickly borrowing costs could come down, Fed officials are now confronting the possibility that inflation will require monetary policy to remain restrictive for longer.
The Fed still expects inflation to cool considerably next year. Policymakers project headline PCE inflation falling from 3.7% in 2026 to 2.3% in 2027, before reaching 2% in 2029.
But the path of interest rates could depend heavily on whether that slowdown actually materializes.
For households and businesses, the immediate message is clearer: the era of steadily falling borrowing costs has, at least for now, been interrupted.
The Fed’s next moves will depend on whether Wednesday’s increase — and the prospect of additional tightening — can push inflation closer to its 2% target without significantly weakening an economy that policymakers say remains resilient.
