Fed Raises Benchmark Rate by 0.25 Percentage Point for First Time in 3 Years and 2 Months

The U.S. benchmark interest rate rose for the first time in 3 years and 2 months, creating a new variable for global financial markets and the Korean economy. The U.S. central bank, the Federal Reserve, announced on the 16th (local time) that it had raised its benchmark rate by 0.25 percentage points to an annual range of 3.75–4.00% at the meeting determining U.S. interest rate policy (the Federal Open Market Committee, FOMC) held in Washington, D.C. It was the first hike since July 2023, and the decision was made unanimously, with all 12 voting members in favor. Higher interest rates increase borrowing costs, affecting corporate investment and household loan interest payments.

According to the dot plot, the median year-end benchmark rate projection rose to 4.1%, up 0.3 percentage points from June. Of the 18 participants, four projected 4.25–4.50% and 12 projected 4.00–4.25%, while only two members expected rates to stay at the current level. The median projection for the end of next year was raised from 3.6% to 4.1%. Chair Kevin Warsh did not participate in the dot plot vote.

In its statement, the Fed said that "inflation remains elevated" and that "today's policy action will support a more timely return to the 2% inflation target." The Fed raised its projection for this year's personal consumption expenditures (PCE) inflation to 3.7%, up 0.1 percentage point from June.

The decision was the first rate adjustment since Chair Warsh, appointed by U.S. President Donald Trump, took office. President Trump, who has been calling for rate cuts, again argued on social media immediately after the announcement that rates should be lowered below 1%.

At his press conference, Chair Warsh emphasized that "inflation has been running above target for more than five years" and that "the clear fact is that inflation is too high and has persisted for too long." He characterized the hike as "removing a portion of accommodation" and noted that current financial conditions can hardly be considered restrictive, leaving open the possibility of further tightening.

Immediately after the announcement, the Dow Jones Industrial Average fell by nearly 630 points, and the S&P 500 also dropped around 0.5%. The dollar strengthened and Treasury yields rose. With the hike, the gap between U.S. and Korean benchmark rates widened to 1.00 percentage point based on the upper end of the U.S. range. The Bank of Korea's benchmark rate currently stands at 3.00% following back-to-back hikes in July and August. The Fed has two FOMC meetings remaining this year, on October 27–28 and December 8–9.