The Fed raises interest rates for the 1st time in over 3 years

Updated September 16, 2026 at 15:32 PM ET

The Federal Reserve raised interest rates for the first time in more than three years Wednesday, in a show of its determination to attack stubborn inflation.

The central bank raised its benchmark interest rate by a quarter percentage point to a range between 3.75% and 4%. That makes it more costly to borrow money to buy a car, grow a business or carry a balance on a credit card.

"Inflation remains elevated," Fed policymakers said in a statement. "Today's policy action will support a timelier return to the Committee's 2% goal."

The U.S. war with Iran has rekindled inflation, pushing oil and gasoline prices higher and driving the price of diesel fuel into record territory. Higher interest rates won't automatically bring lower prices at the pump, but they do signal the central bank's commitment to restoring price stability.

Financial markets had widely expected the rate hike after hawkish comments from Fed chairman Kevin Warsh last month.

"The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank," Warsh told an audience in Jackson Hole, Wyoming. "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do."

Still, some economists questioned whether the rate hike would have much effect on price pressures.

"Today's decision reinforces the Fed's commitment to price stability and addresses credibility concerns," said Selma Hepp, chief economist at the real estate data firm Cotality. "The bigger question is whether the Fed risks fighting the wrong inflation battle. A rate hike is unlikely to lower gasoline prices, reduce tariff-related costs, or accelerate homebuilding, but it will further dampen housing demand and delay a broader market recovery."

Gas prices are a big driver of inflation

Annual inflation was clocked at 3.4% in August, according to the cost-of-living index released by the Labor Department last week. Prices rose a sharp four-tenths of a percent between July and August, with a surge in gasoline prices accounting for more than a third of the total monthly increase.

The price of diesel fuel has reached an all-time high, averaging $6.31 a gallon on Wednesday, according to AAA. That has the potential to raise the cost of many other goods that have to be transported by truck or train.

Since April, prices have been climbing faster than average wages, so the typical worker's paycheck doesn't stretch as far as it used to.

Forecasts released at the conclusion of Wednesday's meeting show Fed policymakers expect an average of one additional quarter-point rate increase this year and no rate hikes in 2027.

Warsh, who took over as Fed chairman in May, did not offer a forecast. He has generally discouraged such forward guidance, fearing it could tie the Fed's hands and leave policymakers with less maneuvering room.

The bond market is already pushing long-term borrowing costs higher. The yield on 10-year Treasurys topped 5% this week. Bondholders are demanding higher returns in response to inflation and the strong demand for capital from both the federal government and private borrowers.

The yield on 10-year Treasurys helps set the rate for many types of borrowing, including mortgages and car loans.
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