Federal Reserve hikes key rate for 1st time in 3 years, defying Trump
demands for a cut
[September 17, 2026] By
CHRISTOPHER RUGABER
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, and the central bank signaled another rate hike could
occur later this year.
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 its rate-setting committee could raise it a second time to
4.1%.
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.
It adds another potentially dicey economic variable for Republicans and
President Donald Trump, who blasted the decision Wednesday and accused
the Fed's top policymakers of trying to hurt him politically.
Chair Kevin Warsh, who was nominated by Trump, emphasized after the
announcement that the economy has shown signs of gathering speed since
the central bank decided to keep rates unchanged in late July. Inflation
has also remained stubbornly above the Fed's 2% target, and he noted
there is little sign it is cooling.
“The plain fact is that inflation is too high and has been for too
long,” Warsh said. “We must be confident that underlying inflation is
moving to our objective clearly and at sufficient speed. Today the FOMC
decided that this standard has not been satisfied,” he added, referring
to the policy-setting Federal Open Market Committee, an arm of the Fed.
“Warsh’s tough talk around inflation in the post-meeting press
conference suggested that he may be pushing for higher rates in meetings
to come,” said Preston Caldwell, chief U.S. economist at Morningstar.
Warsh also said renewed combat between the U.S. and Iran, which has
driven up gas prices, had convinced Fed officials to support rate hikes.
“There’s no hiding from hot spots around the world,” he said.
The president lashed out at ‘a bunch of politicians’
Trump, speaking to reporters in North Carolina ahead of a midterm
campaign rally, made no mention of his policies that influenced the
decision, instead framing the historically independent Fed as another
political actor in Washington.
“The board is very hostile. They’re very political. They’re doing the
wrong thing. They’re a bunch of politicians,” he said, adding, “They’re
raising rates to make Trump do as bad as they can possibly do.”
Warsh noted that other central banks are hiking interest rates in
response to global turmoil and higher gas prices. The European Central
Bank raised its key rate last week, and the Bank of Japan is expected to
do the same Sept. 18.
The Fed next meets in late October and most economists expect officials
will keep rates unchanged then because it is just a week before the
midterm elections. But Wall Street analysts now see a rate hike by
December as a near certainty, according to futures prices.
Also late Wednesday, the yield, or interest rate, on the 2-year Treasury
rose to 4.74% from 4.67%, another sign investors expect the Fed to
potentially lift rates further. Still, if inflation does show signs of
cooling in the coming months, that could change.
Since taking the lead at the Fed in May, Warsh has said it is firmly
committed to taming inflation, and policymakers would take their cues
from the data to determine if inflation was going in the right
direction.
The rate hike marks a turnaround for Warsh. He 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.
In April, when Warsh’s nomination was under consideration by the Senate
Banking Committee, Trump said in a television interview that he would be
disappointed if Warsh didn’t cut rates. On the same day, however, Warsh
told the committee he did not promise Trump he would cut rates and said
he would be “an independent actor” as Fed chair.
[to top of second column] |
Federal Reserve Board Chairman Kevin Warsh speaks during a news
conference at the Federal Reserve in Washington, Wednesday, Sept.
16, 2026. (AP Photo/Mark Schiefelbein)
Trump said in North Carolina that he had talked to Warsh ahead of the
vote and told him, “You might as well vote with the board because it’s
not going to matter.”
The fallout from Trump's war remains a factor
The ongoing disruptions from the Iran war, which have pushed up average
gas prices more than 7% from just a month ago, threaten to spread
through the economy and keep broader inflation stubbornly high. An
inflation report last week showed core prices, which exclude food and
energy, accelerated a bit in August.
According to the Fed’s preferred measure, inflation was 3.7% in July
compared with a year ago, up from 2.3% in April 2025, just before Trump
unveiled sweeping tariffs. Core inflation, which excludes the volatile
food and energy categories, was 3.3% in July, the latest data available,
up from 3% just before the Iran war and far above the Fed’s target.
Fed policymakers unanimously supported the rate hike, compared with late
July when the central bank kept rates steady and three officials
dissented in favor of higher rates. Sixteen of the 18 Fed policymakers
who submitted growth and interest rate projections penciled in at least
one further rate hike this year, with four supporting two more
increases.
Earlier Wednesday, the government said retail sales jumped 1.2% in
August from the previous month, a sign that consumers are still spending
at healthy levels despite sentiment surveys that indicate Americans
remain gloomy about the economy. Strong spending is a sign that interest
rates at current levels aren’t necessarily restricting the economy and
cooling inflation.
“While uncertainty remains elevated owing, in part, to geopolitical
developments, domestic spending has been resilient,” the Fed said, a
likely reference to ongoing consumer spending and strong investment in
artificial intelligence data centers by large technology companies.
Higher inflation isn’t all about gas prices. Ongoing investment in AI
has driven up prices for computer chips and other electronic gear,
adding to overall inflation. Tariffs may still be elevating some costs,
such as appliances, which jumped in price last month.
Warsh isn't the first Fed chairman caught in Trump's politics
Trump had 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.
When asked Wednesday how the president might react to the rate increase,
Warsh said, “I’ve got nothing for you on a discussion with the
president.”
On Sunday, Kevin Hassett, Trump’s top economic adviser, was asked in an
interview with Fox News 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 have a measure of protection from the fact that his
father-in-law Ronald Lauder is a friend of Trump’s and a billionaire
donor to his campaigns.
And the president, for all his complaints, insisted he wants Warsh “to
be independent.” Asked explicitly whether he still has confidence in
Warsh, Trump replied, “I do.”
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Associated Press reporter Bill Barrow contributed from Atlanta.
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