Federal Reserve Raises Policy Rate to 3.75%-4.00% as Inflation Stays Elevated

Rate decision

The Federal Open Market Committee raised its federal-funds target range by 25 basis points to 3.75%-4.00% on September 16, 2026, in a unanimous 12-0 vote. The increase, effective September 17, was the Fed’s first since 2023 and reversed part of the easing conducted in 2025. The FOMC statement said economic activity was expanding at a solid pace, domestic spending was resilient, and job gains had kept pace with workforce growth.

The Fed also raised the interest rate paid on reserve balances to 3.90% and the primary-credit rate to 4.00%, according to its implementation note. These administered rates help transmit the decision through overnight dollar funding markets and bank lending benchmarks.

President Donald Trump had publicly demanded rates of 1% or less and accused Fed officials of political action. Publicly available evidence does not support the allegation that the vote was intended to damage him politically: the committee cited inflation and economic conditions, and all 12 voting members backed the increase. Trump also said he retained confidence in Fed Chair Kevin Warsh.

Higher projected policy path

The Fed’s September Summary of Economic Projections put the median federal-funds rate at 4.1% at the end of 2026 and 2027. Those estimates were higher than the June medians of 3.8% and 3.6%, respectively. The projections are conditional forecasts by individual participants rather than commitments by the committee.

Sixteen of 18 projection participants indicated at least one additional increase during 2026. Twelve projected a 4.125% year-end midpoint and four projected 4.375%. Futures markets had assigned more than a 90% probability to the September quarter-point increase before the meeting, according to Reuters, making the revised projected path a more significant new signal for rate expectations.

The FOMC meets again on October 27-28 and December 8-9. A further increase is uncertain because inflation, growth, and labor-market data can change before either meeting.

Inflation and economic outlook

August consumer prices rose 0.4% from July and 3.4% from a year earlier, according to the Bureau of Labor Statistics. Energy prices were 16.3% above their August 2025 level, gasoline prices were up 27.4%, and CPI excluding food and energy rose 2.4% over the year.

Fed Chair Kevin Warsh said inflation remained too high. The September projections estimated 2026 PCE inflation at 3.7%, core PCE inflation at 3.4%, real GDP growth at 2.3%, and fourth-quarter unemployment at 4.1%. The duration of Iran-related conflict and energy disruptions, as well as their pass-through into underlying prices, remains uncertain.

Effects on borrowers and public finances

The rate increase should affect money-market yields, bank prime-linked borrowing, and other short-duration or floating-rate credit most directly. Higher policy rates can restrain demand and limit second-round inflation effects from an energy shock, while they cannot directly increase energy supply.

Mortgage rates, corporate bond yields, and longer-term Treasury yields are not mechanically set by the federal-funds rate. Their movements depend on expected future policy, inflation, and term premiums, so the magnitude and timing of changes in longer-term borrowing costs cannot be inferred from the September increase alone.

Higher yields also raise federal debt-service costs gradually as Treasury securities mature and are refinanced. The Congressional Budget Office projected about $1.0 trillion in federal net-interest outlays for fiscal 2026, up $69 billion from 2025.