Iran war-driven inflation ends five-meeting freeze; Warsh's first move defies Trump's calls for cuts

Federal Reserve Chair Kevin Warsh holds a press conference at the Fed's Washington headquarters on Wednesday (local time). [Reuters]
Federal Reserve Chair Kevin Warsh holds a press conference at the Fed's Washington headquarters on Wednesday (local time). [Reuters]

The Federal Reserve raised its benchmark interest rate by 25 basis points Wednesday, ending five consecutive holds and pivoting back to tightening as the prolonged Iran war drove up global oil prices and reignited inflation fears. It was the Fed's first rate hike since July 2023, a gap of more than three years.

Following a two-day Federal Open Market Committee meeting, the Fed announced Wednesday (local time) that it was lifting the federal funds rate from a target range of 3.50–3.75 percent to 3.75–4.00 percent.

The increase marks the first upward move since July 2023. The Fed had begun cutting rates in September 2024, lowering them three consecutive times through November and December of that year. It cut rates three more times in September, October and December last year, then held the benchmark rate steady at five straight meetings this year.

The decisive factor behind the hike was a resurgence of inflation. As the prolonged conflict with Iran sent energy prices surging, the US economy found itself facing fresh inflationary pressure.

Last month, the US Consumer Price Index rose 3.4 percent from a year earlier. Core CPI — which strips out volatile energy and food prices — climbed 2.4 percent. The fact that overall inflation outpaced core inflation signals that the recent spike in global oil prices is now feeding through in earnest to US consumer prices.

Financial markets had already moved quickly to price in the prospect of Fed tightening. Growing concern that inflation could persist longer than expected sent US government bond yields sharply higher, and market attention shifted from when the Fed might cut rates to how aggressively it would tighten.

Particularly notable is that the first rate adjustment under Fed Chair Kevin Warsh — appointed by President Donald Trump — turned out to be a hike rather than a cut.

Trump has repeatedly pressed the Fed to lower borrowing costs ahead of November's midterm elections, arguing that rate cuts would stimulate the economy. Instead, the Fed moved in the opposite direction, raising the benchmark rate by 25 basis points and prioritizing price stability.

The decision leaves the Fed navigating an increasingly difficult policy path between growth and inflation. Higher rates can dampen demand and ease upward price pressure, but they cannot address supply-side shocks — such as the oil price surge driven by the Iran war — at their source. With market interest rates already elevated and borrowing costs rising for households and businesses, further tightening risks adding strain to the broader US economy.

Holding or cutting rates, on the other hand, risks allowing energy-driven inflation to spread into service prices and wages, entrenching a broader inflationary cycle. The Fed's decision to reach for the rate-hike tool for the first time in more than three years reflects a growing sense of urgency to head off that kind of second-round inflation before it takes hold.


sjy@heraldcorp.com