Fed Raises Rates as U.S. Growth Surges and Inflation Stays High

WASHINGTON — The Federal Reserve raised its benchmark interest rate by a quarter of a percentage point on Wednesday, moving to curb persistent inflationary pressures while the U.S. economy shows signs of robust, business-led expansion. The Federal Open Market Committee voted unanimously, 12-0, to set the federal funds target range at 3.75% to 4.00%.

Federal Reserve Chairman Kevin Warsh said consumer price pressures have not cooled sufficiently. “The plain fact is that inflation is too high and has been for too long,” Warsh said. “This summer’s inflation readings do not tell me that underlying trends have meaningfully improved.”

The Atlanta Federal Reserve recently upgraded its GDPNow estimate for third-quarter economic growth to a seasonally adjusted annual rate of 5.1%. In the previous quarter, real domestic private sales—often viewed as core GDP—rose by more than 4%, while manufacturing profits increased significantly and gave companies the cash flow to finance further expansion.

The rate decision reflects policymakers’ effort to normalize real interest rates in response to strong domestic demand and high productivity without choking off economic momentum. Nonfinancial productivity has grown at an annual rate of over 3% for the past two years. A tax provision enacted roughly one year ago by President Donald Trump and congressional Republicans allows 100% immediate expensing for business investments in machinery, equipment, certain structures, and data center infrastructure.

According to central bank projections based on the latest Consumer Price Index (CPI) and Producer Price Index (PPI) data, the 12-month change in the Personal Consumption Expenditures (PCE) price index—the Fed’s preferred inflation gauge—is expected to be around 3.6% for August. Core PCE, which excludes volatile food and energy costs, is running at approximately 3.2%.

Retail sales rose by 6% year-on-year, providing evidence of resilient domestic spending. Recent Census Bureau reports also found that real median household income has reached an all-time high, poverty rates among Black and Hispanic populations have fallen to historic lows, and income levels for the lowest 25% of earners have reached their highest recorded levels.

Warsh, a former member of the Federal Reserve Board of Governors who served during the 2008 financial crisis, inherited a cumulative inflation rate of approximately 21% from the administration of President Joe Biden and former Fed Chairman Jerome Powell. Policymakers are also navigating a temporary global oil shock linked to foreign policy actions taken by the Trump administration to restrict Iran’s crude exports and curb its nuclear program.

Core CPI stands at 2.4%, and Warsh noted that too many spending categories continue to record price increases above 3% on both a six-month and 12-month basis. In classical supply-side economic theory, rapid productivity growth and robust capital investment are viewed as counterinflationary because they expand productive capacity, allowing the economy to meet high demand without driving up prices.

The Federal Reserve may deploy additional quantitative measures alongside its interest rate policy. Warsh indicated that the central bank is prepared to liquidate excess balance sheet reserves to support and strengthen the value of the U.S. dollar, further stabilizing prices as the central bank adapts to a high-growth economic regime.