US interest rates were raised for the first time in three years on Wednesday, with the Federal Reserve pushing borrowing costs up to 3.75%-4% from 3.5%-3.75%. The move was unanimous, and it comes after years of cheap money. It marks the end of a period during which the central bank cut rates twice and now shifts back toward tighter monetary policy.
The last time the Fed raised rates was in July 2023. Since then, borrowing costs have been cut twice, most recently in December 2025. This is the first increase in any direction since that cut, and it marks a shift back toward tighter monetary policy.
What the Fed Said
Fed Chair Kevin Warsh defended the move in blunt terms. “Inflation is too high and has been for too long,” he said, describing the decision as “sober” and “responsible.” He added that there was “an attitude of optimism” within the Fed leadership, but inflation remained a persistent problem.
Warsh also sought to manage expectations about how far rates might rise. He said the Fed cannot affect individual prices like oil or groceries directly, but can work to stop price rises spreading across the economy. He added that strength in the jobs market and wider economy meant the Fed was staying focused on stabilising prices.
The move was not a surprise to economists who watch the central bank closely. Wednesday’s action followed the path that had been widely expected.
Trump’s Response
President Donald Trump opposed the move. He called for rates to be cut instead, arguing that cheaper money would benefit the US economy. His response came quickly after the announcement.
Trump said rates “should be 1%, or less, because we are the Best Credit in the World – BY FAR.” That statement puts him at odds with the central bank’s view that inflation remains a serious threat to economic stability.
The disagreement is not new. Trump has clashed with the Fed throughout his presidency, often criticising its decisions and questioning its independence. This latest round of tension is likely to continue as the effects of Wednesday’s hike ripple through the economy.
Who Gets Hurt First
The immediate impact will be felt by borrowers. Banks that lend to consumers and businesses have already moved to adjust their rates.
JP Morgan, KeyCorp, and BNY raised their prime lending rate to 7% from 6.75% on Wednesday. That means variable-rate loans tied to the prime rate — including some credit cards and adjustable mortgages — will start costing more to service.
A 30-year fixed mortgage now runs at an average of 6.76%, while a 15-year deal sits at 6.09%.
What the Data Shows
The context for Wednesday’s decision is clear. US inflation has been above the 2% target “for more than five years,” according to Warsh. That persistence is the reason the Fed acted, even though Trump wanted the opposite.
A majority of Fed policymakers expect rates to be hiked again to 4-4.25% before the end of this year. A small majority expect rates could rise further to 4.25-4.5% next year, with cuts beginning in 2028 and 2029. Inflation is predicted to fall steadily to the Fed’s target by 2029.
| Event | Date | Action |
|---|---|---|
| Last rate hike | July 2023 | Rate raised |
| Last rate cut | December 2025 | Rate cut |
| Wednesday’s hike | Today | Rate raised to 3.75%-4% |
| Next hike expected | Before end of year | 4-4.25% |
| Further hikes possible | Next year | 4.25-4.5% |
| Cuts expected | 2028 and 2029 | Rates down |
| Institution | Prime lending rate | Change |
|---|---|---|
| JP Morgan | 7% | Up from 6.75% |
| KeyCorp | 7% | Up from 6.75% |
| BNY | 7% | Up from 6.75% |
| Average 30-year fixed mortgage | 6.76% | N/A |
| Average 15-year fixed mortgage | 6.09% | N/A |
The International Picture
Wednesday’s hike is not happening in isolation. The European Central Bank raised rates last week, and the Bank of England is set to decide on Thursday.
What Comes Next
The next few months will show whether Wednesday’s hike was a one-off or the start of a sustained tightening cycle. The Fed’s projections suggest more hikes are coming, but the timing depends heavily on how inflation responds to the current move.
If inflation falls faster than expected, the Fed may pause or reverse course sooner than planned. If inflation stays stubbornly high, the Fed may push rates even higher than currently projected.
Borrowers should prepare for higher costs. The broader question is whether the public sees the rate hike as a necessary step or a betrayal of the economy’s recovery. That judgment will depend on whether inflation falls as predicted and whether the economy can withstand the squeeze on borrowing.
The Fed has made its move. Now the wait begins to see whether it worked.
Who is protecting what
The practical effect of Wednesday’s rate hike is that the Fed has gained independence to pursue its inflation target, and Trump has gained political leverage against an institution he has criticised for years. The Fed’s projections show more hikes ahead, with cuts expected to begin in 2028 and 2029. Trump’s demand for lower rates put him at odds with the central bank’s view that inflation remains a serious threat.
The paper suspects Trump is protecting his ability to talk about the economy without being constrained by a central bank that disagrees with him. The disagreement is not new. Trump has clashed with the Fed throughout his presidency, often criticising its decisions and questioning its independence.
Ask yourself why the two sides disagree so publicly. The practical effect of the rate hike is that borrowers will face higher costs, and the economy will feel the squeeze until inflation falls as predicted. The judgment of whether the hike was necessary or a betrayal of the recovery will depend on whether inflation falls as forecast and whether the economy can withstand the pressure.
Get the Notebook.
The day's best stories and every fresh verdict, in plain English, in your inbox by seven. One email a day, no more.