Fed Lifts Rates by 25 Basis Points as Fuel-Driven Inflation Pressures US Economy

The US Federal Reserve has announced a quarter-percentage-point interest rate increase as inflation, fueled by surging energy costs amid the US-Iran war, continues to strain the economy.

The central bank said on Wednesday it would raise rates by 25 basis points, bringing the target range to 3.75 percent to 4 percent.

The move marks the first rate increase in more than three years and comes just weeks before the US midterm elections, despite repeated calls from US President Donald Trump for lower borrowing costs.

“Economic activity is expanding at a solid pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient,” the Fed said in a statement.

“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.”

CME FedWatch, which tracks market expectations for monetary policy decisions, had forecast a 92.3 percent probability of the Fed raising rates to the 3.75 percent to 4 percent range. A week earlier, the odds of a quarter-point increase stood at 40 percent.

Since then, a string of economic data has shifted expectations toward a rate hike.

Consumer prices rose 0.4 percent in August, the sharpest monthly increase in four months. On an annual basis, inflation increased 3.4 percent, matching July’s pace, while the labor market remained healthy.

At the same time, benchmark crude oil prices have continued to climb as strikes in the US-Israel war on Iran have intensified. Brent crude was trading near $109 per barrel on Tuesday.

The national average price for a gallon of gasoline stood at $4.36, up 14 cents over the past week and higher than the $4.06 recorded a month earlier, according to the American Automobile Association, which tracks daily fuel prices.

Diesel prices were even more elevated, reaching $6.31 per gallon, the highest average on record and roughly double the level seen a year ago. The increase is expected to add further pressure to prices across the economy, as diesel fuels trucks that transport goods ranging from produce to steel and cement.

The benchmark 10-year Treasury yield also rose above the closely watched 5 percent level on Tuesday, touching 5.02 percent, its highest point in 19 years. The yield influences borrowing costs for products such as auto loans and mortgages and is widely viewed as an indicator of inflation expectations.

“The economy is in an unusual place,” said Michael Klein, professor of international economic affairs at Tufts University’s Fletcher School and executive editor of EconoFact, a nonpartisan economic and social policy publication, as unemployment remains at a manageable level while elevated prices persist above the Fed’s 2 percent target.

“There has been a lot of pressure on Chairman Warsh to raise interest rates because inflation is coming in high, and that has been compounded by concerns about Trump’s pressure,” Klein said, noting that the president has continued to call for lower interest rates.

“Higher interest rates tend to weaken the economy, but if the market believes that there’s going to be a rate increase, it’s priced in already as prices move on news, so this won’t be news,” Klein said, adding that the move could help stabilize yields.

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