Federal Reserve hikes key rate for first time in 3 years, defying Trump demands for a cut

Federal Reserve hikes key rate for.

Key points

• Federal Reserve Board Chairman Kevin Warsh speaks at a news conference at the Federal Reserve in Washington, Wednesday, July 29, 2026.
• Job market rebounds as employers add 162, 000 jobs; the unemployment rate stayed at 4.1%.
• 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.
• "Kevin cares about his legacy, " remarked Kristin Forbes, an economics professor at MIT's Sloan School and former policymaker at the Bank of England.
• 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.

Federal Reserve hikes key rate for first time in 3 years, defying Trump demands for a cut. By: Christopher Rugaber, Associated Press – September 16, 2026.

Federal Reserve Board Chairman Kevin Warsh speaks at a news conference at the Federal Reserve in Washington, Wednesday, July 29, 2026. (AP Photo/Mark Schiefelbein).

Notably, the quarter-point growth lifts the Fed's key rate to concerning 3.9% and, over time, could result in higher borrowing costs for mortgages, auto loans, and credit cards.

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

"Today's policy action will support a timelier return" to the central bank's 2% inflation goal, the Fed remarked in an official note.

Meanwhile, 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.

In practice, the rate hike is a surprising turnaround for Fed Chair Kevin Warsh. This person 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 solid and opposing forces: Financial markets that anticipate the central bank will raise interest rates, and President Donald Trump. This person 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. Shortly 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 additionally 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 administration 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."

Meanwhile, a quarter-point rate growth would be the first in three years and push the Fed's benchmark rate to concerning 3.9%.

While campaigning for the top job last year, Warsh remarked the Fed could lower interest rates. But since getting the nod, the Iran war has sharply raised gas rates, 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. It could undercut its credibility with financial markets.

"Kevin cares about his legacy, " remarked 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 rapidly enough. Though that probe was eventually dropped, his Justice Department even introduced a criminal investigation into Powell over brief testimony he delivered to Congress last year.

"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 remarked.

Warsh might additionally 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 backing a rate hike, it's not clear how numerous 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 extra increases in December and March.

But Jonathan Pingle, an economist at UBS, remarked it is feasible that if future inflation data indicated rate increases cooling, the Fed could forgo more hikes.

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

On Wednesday, the Fed will provide some hints regarding its next moves when it releases its quarterly economic projections. It will include a forecast of where its benchmark rate will be at the end of this year and next. Regarding the Author(s). Christopher Rugaber, Associated Press. Economy Anne D'Innocenzio, Associated Press September 16, 2026.

Retail sales rise a better-than-expected 1.2% in August after shoppers pulled back spending in July.

Consumers may be griping regarding higher costs at the pump and elsewhere, but they keep spending, helping to power the economy, according to the latest administration snapshot. More From This Author. News Christopher Rugaber, Associated Press September 15, 2026.

Federal Reserve is projected to raise its benchmark rate, defying Trump's demands. Economy Christopher Rugaber, Associated Press September 11, 2026.

U.S. Inflation picked up as gas rates marched higher due to conflict in the Middle East. Economy Christopher Rugaber, Associated Press September 10, 2026.

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U.S. Job market rebounds as employers add 162, 000 jobs; the unemployment rate stayed at 4.1%.

Employers have been reluctant to let go of the staff they have, so most Americans enjoy unusual job security and unemployment is low. News Christopher Rugaber, Associated Press August 28, 2026.

Fed Chair Warsh signals rate hikes may be needed with inflation still elevated.

Warsh notes inflation is still too high and suggested the central bank may have to raise interest rates in the coming months to bring it down, a clearer signal than he has sent before concerning his economic outlook. News Kevin Freking, Associated Press September 17, 2026.

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In short, federal Reserve hikes key rate for first time in 3 years, defying is the central thread here, and readers can expect follow-up reporting as the picture becomes clearer.