Fed Weighs First Rate Hike Since 2023

The Federal Reserve is widely expected to raise its benchmark interest rate on Wednesday for the first time in three years, a quarter-point increase that would lift the federal funds target range to 3.75%-4% and place the central bank squarely at odds with President Donald Trump. Traders have assigned a better-than-90% probability to the move, according to CNBC’s live coverage of the meeting, up from just 36% a month earlier.

If approved at the conclusion of the two-day policy meeting, the hike would be the first since July 2023. Since then, the Federal Open Market Committee has lowered rates six times, by a total of 175 basis points.

A Reversal Driven by Stubborn Inflation

The decision reflects a Federal Reserve increasingly worried that inflation is not cooling fast enough. Core PCE, the central bank’s preferred gauge, ran just above 3% annually in July. In a speech at the Fed’s Jackson Hole symposium in late August, Chair Kevin Warsh said recent inflation reports “do not tell me that underlying trends have improved,” adding that if conditions did not change soon, “we have work to do.”

Much of the price pressure comes from forces outside the Fed’s direct control. Crude oil has surged back above $100 a barrel amid the renewed conflict with Iran, while heavy investment in artificial intelligence data centers is adding to both inflation and longer-term borrowing costs. Reporting from the Associated Press noted that an August inflation reading showed core prices picking up month over month.

“I don’t see any end to the war in Iran right now,” Kristin Forbes, an economist at MIT’s Sloan School, told the AP. “Given what everyone has been through in the last few years of high inflation, consumers are more sensitive, companies are more sensitive, they raise prices faster … The risks are much more on more persistent inflation than it falling quickly.”

Political Pressure Mounts Before Midterms

The rate decision lands roughly seven weeks before November’s midterm elections, in which high prices and affordability are central issues. Trump has repeatedly demanded that the Fed cut rates, and on Sept. 4 he argued that because the economy is growing, the United States “should have the lowest interest rates in the world.” Vice President JD Vance, Treasury Secretary Scott Bessent, and senior economic counselor Peter Navarro have all publicly urged the Fed not to hike, CNBC reported. Navarro called a hike “careless” and reportedly referred to FOMC members as “clowns.”

Warsh, who replaced Jerome Powell and was sworn in on May 22, 2026, has resisted providing the forward guidance his predecessors offered — a stance that adds to the uncertainty surrounding Wednesday’s decision. Economists warn that failing to act could damage the central bank’s credibility.

“At the end of the day the Chair’s repeated stern warnings on inflation intolerance risk institutional credibility absent some action to back it up,” Michael Feroli, an economist at JPMorgan Chase, wrote in a preview of the meeting.

National Economic Council Director Kevin Hassett, meanwhile, defended Warsh’s independence while cautioning against a pre-election hike. “I’d be wary of a rate hike … I think if you want an independent Fed, then one thing the Fed does is it stays out of the way of elections,” he said.

Markets Brace for a Shift

Financial markets have already begun adjusting. The 10-year Treasury note yield scaled to a 19-year high of 5.041% on Tuesday, its highest level since 2007, before pulling back to around 4.96%. The benchmark yield’s climb reflects investor fears that elevated energy prices will keep inflation sticky.

Equity investors are watching closely as well. Bespoke Investment Group noted that the S&P 500 has fallen on each of the past five Fed decision days in 2026, averaging a 1.5% drop. Nicole Inui, head of equity strategy for the Americas at HSBC, offered a longer view: “In historical rate hike cycles, S&P 500 performance typically dips initially but gradually recovers.”

Few analysts expect a single hike to be the end of the story. Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said it is rare for the Fed to lift its key rate just once, since a lone quarter-point move would have little effect on the economy. Morgan Stanley’s Michael Gapen expects another hike in December, while Joe LaVorgna of SMBC Americas sees “at least four.” Wall Street traders, per futures prices, are pricing in three — in September, December, and March.

What to Watch

Warsh’s news conference at 2:30 p.m. ET will matter as much as the decision itself. Analysts will parse whether he frames the move as unwinding the cuts made in late 2025 or as an act of “risk management” — signals that could hint at how many hikes lie ahead. The Fed will also release its updated Summary of Economic Projections, including the closely watched “dot plot” of officials’ rate expectations.

With oil prices elevated, inflation above target, and an unpredictable AI investment cycle in play, the path forward remains unusually murky. What is clear is that the Fed, at least for now, is choosing to confront inflation head-on — even as its political patrons argue otherwise.