Fed raises US rate to 4% as Warsh defies Trump on inflation

The United States has raised its benchmark interest rate for the first time in three years, lifting the federal funds target by a quarter of a percentage point and signalling that another increase is likely before the end of 2026.

The Federal Open Market Committee voted unanimously on Wednesday to set the policy range at 3,75% to 4%. It is the first increase since July 2023, and it was decided over the objections of US President Donald Trump, who has argued publicly that American borrowing costs should be the lowest in the world and has threatened to widen his trade measures if the Fed does not cut.

The decision matters in Johannesburg and Cape Town as much as it does in Washington. A higher US policy rate pulls global capital towards dollar assets, which tightens conditions for every emerging market, South Africa included. It feeds directly into the cost of the foreign debt the government issues, into the yields foreign investors demand to hold South African bonds, and into the rand, which sets the price of imported fuel, wheat and machinery.

What the committee decided

Fed Chair Kevin Warsh told reporters after the vote that the committee had removed part of the support it had been giving the economy, so that financial and credit conditions would line up better with where policy is trying to get.

His concern is inflation that is proving stubborn rather than fading. Warsh said too many categories of goods and services were still running annualised price gains above 3% measured over six and 12 months.

“This summer’s inflation readings do not tell me that underlying trends have meaningfully improved,” he said.

The committee’s post-meeting statement described inflation as elevated while painting the economy in favourable terms. Officials said productivity growth is strong and capital investment is robust, that job gains have kept pace with the workforce, and that the unemployment rate has barely moved. They repeated their commitment to price stability.

Even so, the committee pushed out by a full year the point at which it expects inflation to return to its 2% target. The median forecast now sees that happening in 2029.

The numbers behind the vote

In the rate projections released with the decision, the median expectation among officials for where the policy rate sits at the end of 2026 moved up to 4,1%, from 3,8% in June. Sixteen officials projected at least one further increase this year, against six in June who expected at least two increases across 2026.

The median projection for 2027 shows no further increases next year, though eight policymakers favoured another quarter point by the end of 2027.

As happened in June, Warsh declined to submit his own forecasts, and 18 of the 19 officials provided projections for 2026 and 2027.

The vote followed a Bureau of Labour Statistics report last week showing core inflation rose faster than expected in August. That reading hardened the market view that an increase was coming, and it added to concern that price pressure is broadening beyond the temporary effects of tariffs and the energy price shock linked to the Iran war.

What markets did

Short-dated US Treasury yields rose and the dollar strengthened once the decision landed. The two-year yield, the part of the curve that tracks the policy rate most closely, gave up an earlier fall and traded at 4,71%, more than ten basis points above where it stood before the announcement. Longer maturities moved less, and the 10-year yield stayed lower on the day at 4,97%.

The politics Warsh walked into

Trump repeated on Sunday that US borrowing costs should be the lowest in the world. Asked by a reporter what his message to the president was, Warsh said he had nothing for the question about a discussion with the president.

Warsh had warned last month that inflation was not slowing in any meaningful way, which opened the door to tighter policy.

Support for higher rates has been building inside the Fed through the year. Rates were left unchanged at the July meeting, but three regional Fed bank presidents dissented in favour of an increase: Lorie Logan of Dallas, Beth Hammack of Cleveland and Neel Kashkari of Minneapolis. The record of that meeting showed many officials saying tighter policy would be necessary if inflation did not come down.

What it means from here

The immediate consequence for South Africa is a firmer dollar and a narrower gap between what US assets pay and what South African assets pay, which is the gap that has to widen to keep foreign money in local bonds. A stronger dollar makes imports more expensive and gives the Reserve Bank less room to move its own repo rate down while inflation expectations are already easing, as Moneyweb reported this week.

For households, the chain runs through fuel, food and the cost of credit. For the fiscus, it runs through the interest bill on dollar-denominated debt and through the yield Treasury has to offer at the next auction.

The next dated step is the Fed’s October meeting, when the committee will weigh a further quarter point against the inflation prints due before it. The Bureau of Labour Statistics releases September consumer price data in the second week of October, and the FOMC’s next decision follows at the end of that month.

Source: Moneyweb, Fed raises rates, signals another hike as inflation persists