The Federal Open Market Committee (FOMC) decided unanimously today to raise the federal funds target range by a quarter of a percentage point to 3.75 to 4 percent as part of “its policy of maintaining ample reserves in the banking system.” This is its first interest rate hike in three years.
The Committee cited elevated uncertainty around geopolitical developments, but called domestic spending “resilient,” productivity growth “strong” and capital investment “robust.” It pointed out, however, that because inflation remains elevated, the rate hike is designed to help “support a timelier return to the Committee’s 2 percent goal.”
In a press conference providing more details on the decision, Federal Reserve Chair Kevin Warsh said, “Our decision comes at a time when the American economy appears to be strengthening.” Warsh characterized the committee as holding “an attitude of optimism” when evaluating economic factors in its decision.
“The plain fact is that inflation is too high and has been for too long,” he continued.
Warsh said that overall commodity prices are on the committee’s radar, among other factors like the recent Consumer Price Index, which rose 0.4 percent from July to August.
Warsh said that the committee was led by principles and would not pre-judge any future decisions. “Sometimes the market tries to pre-judge our outcomes,” he continued.
In answer to a question about how the move would affect American consumers, Warsh said, “The least well-off have the most to gain from stable prices.” He declined to answer questions about how his decision today would be viewed by President Trump, who has often called for interest rate cuts to boost the economy.
The National Association of Realtors’ Chief Economist Lawrence Yun weighed in with a statement after the announcement, saying, “Average mortgage rates rose from 6 percent in late February to 7 percent this week, ahead of the Federal Reserve’s first rate hike in three years today. That’s because inflation picked up after the oil price shock and continuing concerns about unconstrained inflation. The whopping, still-growing federal deficit does not help, as more government borrowing means less capital available for the private sector, including for mortgages.”
“Mortgage rates can come down once oil prices retreat and with a credible plan to reduce the budget deficit,” he continued. “Also, if AI technology boosts worker productivity, then inflation and long-term borrowing rates, like for mortgages, can decline. These developments are highly uncertain, at least in the upcoming months. Expect 7 percent as the new normal. Job additions will be the one factor that can support homebuying.”
This article has been updated with additional commentary from Kevin Warsh and Lawrence Yun.
