Federal Reserve Raises Policy Rate to 3.75%–4.00% as Inflation Remains Elevated

Policy decision and inflation

The Federal Open Market Committee unanimously raised its federal-funds target range by 25 basis points on September 16 to 3.75%–4.00%, its first increase since 2023. The Federal Reserve also raised the primary credit rate to 4.00%, effective September 17. In its policy statement, the Fed said economic activity was expanding at a solid pace, domestic spending was resilient, capital investment was robust and inflation remained elevated.

August consumer prices rose 0.4% from July and 3.4% from a year earlier, according to the Bureau of Labor Statistics. Energy prices increased 2.1% during the month and 16.3% over 12 months. Gasoline rose 3.9% monthly and 27.4% annually. Core CPI, which excludes food and energy, rose 2.4% over 12 months, indicating that inflation pressure extended beyond energy.

The Energy Information Administration reported that Brent crude averaged $91 a barrel in August, $7 above its July average, amid constrained Middle Eastern exports. It estimated production shut-ins at 6.7 million barrels a day in August and forecast Brent near $90 in the second half of 2026. The EIA forecast depends on shipping flows and production gradually normalizing, leaving the duration of the supply disruption uncertain.

Long-term yields and borrowing costs

The rate decision did not cause the 10-year Treasury yield to first reach 5%. Treasury data show the benchmark yield closed at 5.00% on September 15, before the FOMC announcement, and at 5.01% on September 16. It then closed at 4.94% on September 17 and 5.01% on September 18, according to the Treasury’s daily par-yield data.

The chronology indicates that long-term rates reflected factors beyond the single policy decision, including expectations for inflation, growth, Treasury supply and term premiums. The persistence of yields near 5% remains uncertain because those factors can change independently of the Fed’s overnight-rate target.

Higher policy rates directly affect overnight financing benchmarks and can raise costs for floating-rate borrowers as contracts reset. A 10-year Treasury yield near 5% also affects pricing for mortgages and many corporate bonds. Freddie Mac reported that the average 30-year fixed mortgage rate reached 6.95% on September 17, up from 6.76% a week earlier and 6.26% a year earlier.

Outlook and limits of the forecast

Federal Reserve projections released with the decision show a median expectation for 2026 real GDP growth of 2.3%, unemployment of 4.1%, PCE inflation of 3.7%, core PCE inflation of 3.4% and a year-end federal-funds rate of 4.1%. The projections are consistent with another quarter-point increase, though they do not commit the FOMC to one.

The latest completed GDP estimate showed second-quarter real GDP growth at a 1.5% annual rate, down from 2.1% in the first quarter. Consumer spending, exports and investment contributed positively. The Fed’s stronger 2026 growth projection therefore represents an outlook rather than confirmation that growth has already accelerated.

Higher rates can restrain demand over time, while monetary policy cannot directly restore disrupted oil production or shipping capacity. The next major official updates were scheduled for September 30 for GDP and October 14 for September CPI. Those releases, along with employment and financial-market data, will shape whether the FOMC delivers the additional increase implied by its median projection.