Fed raises interest rates for first time in 3 years, battling persistent inflation

WASHINGTON — The Federal Reserve raised interest rates Wednesday for the first time in three years as inflation continues to dog the economy, largely driven by soaring gas and fuel oil prices while the war in Iran drags on.

The central bank’s Federal Open Market Committee voted 12-0 to increase its benchmark interest rate by a quarter of a percentage point, reaching the new range from 3.75% to 4% and making the cost of borrowing more expensive for Americans.

The committee released an upbeat statement touting economic growth at “a solid pace.”

“While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient. Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little,” according to the statement released Wednesday afternoon.

“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,” the statement continued.

Trump campaign for lower rates

President Donald Trump publicly pressured and name-called Fed Chair Kevin Warsh’s predecessor Jerome Powell for months for not lowering interest rates. 

The public attacks escalated into a federal probe of Powell and the Fed for costly renovations at the Fed’s headquarters in Washington. The administration eventually dropped the investigation.

The White House did not immediately respond to a request for comment.

The interest hike comes less than a week after the government’s latest consumer price index revealed the cost of food, energy, housing and other goods and services rose 0.4% from July to August. The cost of all items over the past year has risen 3.4%.

Soaring gas prices

Spiking energy prices caused by the war in Iran were the main driver behind higher costs. Gasoline alone rose 3.9% over the month of August. 

As of Wednesday, Americans were paying an average of nearly $4.37 a gallon at the pump, according to AAA. Diesel prices reached a record high of $6.31.

The price of a barrel of oil surged above $100 in recent days, including Wednesday afternoon, when it reached $105, as fighting flared in the Middle East. 

The United States and Iran continue launching rockets in the Strait of Hormuz, where one-fifth of the world’s petroleum traveled prior to the war. U.S. Central Command claimed Sept. 8 that it “destroyed” five Iranian crude oil carriers as part of its naval blockade aimed at damaging Iran’s economy.

The conflict spilled over in July into another key waterway for Saudi Arabian oil exports. Iran-backed Houthi rebels restarted an assault on commercial vessels in the Red Sea for the first time since 2024, and are fighting for control of the Bab al-Mandab strait. The group also directly struck targets in Saudi Arabia, a U.S. ally, beginning in July, and is threatening more strikes, according to Houthi spokesman Yahya Saree. The United Nations Security Council is warning of the likelihood of a humanitarian crisis.