Fed Hikes Key Rate, Defies Trump       09/16 13:10

   The Federal Reserve raised its benchmark interest rate Wednesday for the 
first time since 2023 in an effort to quell stubbornly-high inflation, a move 
that could spur a sharp response from the White House.

   WASHINGTON (AP) -- The Federal Reserve raised its benchmark interest rate 
Wednesday for the first time since 2023 in an effort to quell stubbornly-high 
inflation, a move that could spur a sharp response from the White House.

   The quarter-point increase lifts the Fed's key rate to about 3.9% and, over 
time, could result in higher borrowing costs for mortgages, auto loans, and 
credit cards. In a set of quarterly projections, the Fed also signaled that its 
rate-setting committee expects to hike rates a second time later this year to 
4.1%.

   "Today's policy action will support a timelier return" to the central bank's 
2% inflation goal, the Fed said in a statement.

   The move comes as Americans are already struggling with high costs for 
groceries, gas, and housing. Affordability has taken on a leading role in the 
upcoming midterm elections, just seven weeks away.

   The rate hike is a surprising turnaround for Fed Chair Kevin Warsh, who was 
appointed by President Donald Trump and took over the top job in May. Warsh 
often suggested last year when under consideration by Trump that the Fed could 
reduce its key rate, echoing the president's call for lower borrowing costs.

   THIS IS A BREAKING NEWS UPDATE. AP's earlier story follows below.

   WASHINGTON (AP) -- Barely four months into the job, Federal Reserve Chair 
Kevin Warsh is stuck between two strong and opposing forces: Financial markets 
that anticipate the central bank will raise interest rates, and President 
Donald Trump, who wants the Fed to cut them or leave them unchanged.

   Economists expect that on Wednesday, Warsh and his fellow policymakers will 
side with the markets.

   Warsh, economists say, has largely boxed himself into a rate hike after 
delivering a high-profile speech last month warning that inflation remains too 
far above the Fed's 2% target and might require higher borrowing costs to bring 
it down. A report last week showing inflation is still stubbornly high largely 
sealed investors' expectations.

   Warsh has faced this dilemma before. Soon after becoming chair May 22, he 
delivered tough rhetoric on inflation, but in late July the central bank left 
its key rate unchanged. After he provided little explanation for his decision 
at a press conference, investors pushed up longer-term interest rates, 
accelerating a process that is still ongoing. This week, the rate on the 
10-year Treasury bond reached 5% for the first time in three years. Mortgage 
rates, which closely follow the 10-year Treasury, have also risen.

   If the Fed doesn't hike its key rate Wednesday, it risks a replay of what 
happened in late July, economists say. When investors expect inflation to stay 
high, they demand higher interest rates on government and corporate bonds to 
compensate.

   "That is the paradox: A hike now could lower long-term rates later," Diane 
Swonk, chief economist at KPMG, wrote in an email. "Restore faith in the 2% 
target, then the inflation premium can fall. Fail, and markets will tighten 
instead through higher mortgage rates, business borrowing costs and interest on 
the debt."

   A quarter-point rate increase would be the first in three years and push the 
Fed's benchmark rate to about 3.9%.

   While campaigning for the top job last year, Warsh said the Fed could lower 
interest rates. But since getting the nod, the Iran war has sharply raised gas 
prices, lifting inflation to 3.7% in July, according to the Fed's preferred 
measure. In April 2025, before Trump's tariffs, it had fallen to 2.3%.

   Core inflation, which excludes the volatile food and energy categories, was 
3.3% in July, up from 3% just before the Iran war.

   If the Fed forgoes a rate hike, it would risk being seen as giving in to 
pressure from the White House, which could undercut its credibility with 
financial markets.

   "Kevin cares about his legacy," said Kristin Forbes, an economics professor 
at MIT's Sloan School and former policymaker at the Bank of England. "And he 
knows that Fed chairs who follow political pressure instead of the economy do 
not go down well in the annals of history."

   Trump harshly criticized Warsh's predecessor, Jerome Powell, for not cutting 
rates quickly enough. His Justice Department even launched a criminal 
investigation into Powell over brief testimony he delivered to Congress last 
year, though that probe was eventually dropped.

   Kevin Hassett, Trump's top economic adviser, was asked in an interview with 
Fox News on Sunday how Trump might react to a rate hike.

   "I'm sure he's not going to be super happy about it, but he will defend the 
independence of Kevin Warsh above all," Hassett said.

   Warsh might also have a measure of protection from the fact that his 
father-in-law is Ronald Lauder, a friend of Trump's and a billionaire donor to 
his campaigns.

   Even if Warsh decides to support a rate hike, it's not clear how many more 
will follow. It's unusual for the Fed to change rates just once. Typically the 
central bank embarks on a series of hikes or rate cuts to push the economy in 
the direction it seeks.

   There is one precedent for a single hike: In 1997, former chair Alan 
Greenspan lifted rates by a quarter-point in March of that year. Yet a 
financial crisis ignited in Asia that July, prompting the Fed to remain on 
hold. When the crisis worsened in 1998, the Fed ultimately cut rates three 
times that fall.

   For now, Wall Street investors anticipate the Fed will hike three times, 
with additional increases in December and March.

   But Jonathan Pingle, an economist at UBS, said it is possible that if future 
inflation data showed price increases cooling, the Fed could forgo more hikes.

   "They don't have to follow through on that if the data goes their way," 
Pingle said.

   On Wednesday, the Fed will provide some hints about its next moves when it 
releases its quarterly economic projections, which will include a forecast of 
where its benchmark rate will be at the end of this year and next.