The Federal Reserve raised interest rates by a quarter percentage point this week, its first rate hike in more than three years, as policymakers respond to persistent inflation.
The Federal Open Market Committee voted unanimously to raise the federal funds rate to a target range of 3.75% to 4%. The Fed had held rates at 3.5% to 3.75% since December 2025.
The move follows several months of renewed inflation pressure. Consumer prices rose 3.4% in August compared with a year earlier, remaining well above the Fed’s 2% inflation target.
In its September 16 statement, the Federal Open Market Committee said economic activity continues to expand at a solid pace, with resilient domestic spending, strong productivity growth, and robust capital investment. Job growth has kept pace with workforce growth, while the unemployment rate has changed little.
The Fed raised rates to put additional downward pressure on inflation by increasing borrowing costs and slowing demand throughout the economy. Higher rates can temper consumer and business spending, although they do not directly address supply-driven price increases such as higher energy costs.
The increase also reverses the direction of monetary policy after the Fed cut rates six times between September 2024 and December 2025. The September increase marks the first rate hike since July 2023.
Updated projections released alongside the decision suggest rates could move higher again. The median projection among Federal Reserve policymakers puts the federal funds rate at 4.1% at the end of 2026, compared with the current midpoint of 3.875%.
Higher rates will add pressure to an already expensive borrowing environment. Credit card and other variable rates generally respond more directly to changes in the federal funds rate, while mortgage rates depend more heavily on longer-term Treasury yields and other market conditions.
Housing affordability remains particularly strained. The average 30-year fixed mortgage rate reached 6.95% this week, up from 6.26% a year ago and the highest level in more than 19 months.
For state and local governments, higher interest rates can increase borrowing costs for infrastructure and other capital projects and affect housing activity, business investment, and the broader economy.
Stay tuned to Conduit Street for more information.
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