On Wednesday, the Federal Open Market Committee moved the federal-funds target band up to 3.75%-4%, marking the first hike in over three years. The members voted unanimously, indicating a view that the economy can absorb tighter monetary policy while the Fed strives to bring inflation back to its 2% long-term objective.
What the data shows
According to the central bank’s schedule, the Federal Open Market Committee (FOMC) convened its September meeting on the 15th and 16th of the month. Data from the Bureau of Labor Statistics revealed a 3.4% year-over-year increase in consumer prices for August. The core Consumer Price Index (CPI), which excludes volatile food and energy prices, rose by 2.4%, marking the smallest annual increase since March 2021. This indicates that underlying inflationary pressures are easing, even as overall inflation remains high.
Updated forecasts from the FOMC show that 12 out of 18 members anticipate one more rate hike at either of the Fed’s remaining two meetings this year. Four members predict two additional increases, while two foresee no further hikes. Fed Chair Kevin Warsh did not provide a personal forecast, but the projections highlight the committee’s focus on reducing inflation without disrupting the labor market, which officials describe as stable heading into the fall season.
In August, prices increased by 0.4% compared to July, primarily due to a 3.9% surge in gasoline costs. Over the past year, the energy index rose by 16.3%, with gasoline prices climbing 27.4%. Core inflation remained at 2.4% for the 12 months ending in August, the lowest annual rate since March 2021. The Fed’s preferred measure, the personal consumption expenditures (PCE) price index, also remains above target, keeping pressure on policymakers to maintain tight monetary conditions.
The ongoing conflict involving Iran has increased volatility in energy markets, driving up gasoline and fuel prices and complicating the Federal Reserve’s efforts to reduce inflation. Higher energy costs can impact transportation and production expenses, though cooling core inflation suggests some pressure may be easing outside the energy sector. The Congressional Budget Office has warned that the conflict could raise inflation more than previously expected.
Meanwhile, President Trump continues to call for lower interest rates, while Kevin Warsh emphasizes the Fed’s duty to address raised inflation. In August, Warsh stated that the Fed has “work to do” if price growth does not align with its 2% goal.
