The United States Federal Reserve raised interest rates by a quarter of a percentage point to a range of 3.75 percent to 4 percent on Wednesday, saying elevated inflation continues to weigh on the economy.
The increase is the Fed’s first in more than three years and comes weeks before US midterm elections, despite repeated demands from President Donald Trump for lower rates.
Why the Fed acted
The central bank said economic activity was expanding at a solid pace and domestic spending remained resilient, but uncertainty was elevated partly because of geopolitical developments. It said the policy move would support a timelier return to its 2 percent inflation goal. Read the context: Federal Reserve keeps rates steady amid renewed inflation pressure.
Consumer prices rose 0.4 percent in August, the largest monthly increase in four months. Annual inflation was 3.4 percent, matching July’s increase, while the job market remained healthy.
Fuel and borrowing costs add pressure
The increase in fuel costs has been linked to soaring crude prices amid the US-Iran war. Brent crude was near $109 on Tuesday, while the average US petrol price reached $4.36 per gallon, up 14 cents in a week and from $4.06 a month earlier.
The average diesel price reached $6.31, its highest recorded level and roughly double its level a year earlier. Because diesel powers trucks transporting goods including food, steel and cement, higher diesel costs can add to broader price pressures.
The 10-year Treasury yield climbed above 5 percent on Tuesday, reaching 5.02 percent, its highest level in 19 years. The yield is a benchmark for borrowing costs such as car loans and home mortgages.
Expectations shifted before the decision
CME FedWatch put the probability of a quarter-point increase at 92.3 percent before the decision, up from 40 percent a week earlier. The shift followed the latest inflation data and the continued rise in oil prices.
Michael Klein of Tufts University’s Fletcher School said the economy was in an unusual position, with unemployment at a comfortable level while prices remained above the Fed’s target. He said market expectations could limit the immediate surprise from the increase because a widely anticipated move is already reflected in prices.
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