Under the leadership of Kevin Warsh, the Federal Reserve of the United States raised the interest rate by 25 basis points on Wednesday, bringing it to a range of 3.75 to 4 percent. This increase followed the maintenance of rates in the previous meeting in July and was a response to the strengthening economy and persistent inflation in the country.
Reasons for the Interest Rate Increase
Warsh, in response to a question about changes between the two meetings, referred to recent data indicating a strengthening labor market and improvement in the economic situation of the United States. According to him, inflation trends over the summer did not show sufficient progress towards the Federal Reserve's 2 percent target, and geopolitical conditions have also changed.
Warsh stated, "These three factors contributed to today's decisive and unanimous decision." The unemployment rate currently remains at 4.1 percent, and job opportunities and average working hours are also increasing, which allows the Federal Reserve to focus on price stability.
Future Predictions
Based on the latest consumer and producer price data, the personal consumption expenditure (PCE) inflation rate in August was estimated at around 3.6 percent, and the core PCE inflation rate was around 3.2 percent. Warsh also emphasized that many categories are still recording price increases above 3 percent.
This interest rate increase is known as "a degree of tightening," and Warsh stated that he and other policymakers had difficulty describing financial conditions before the meeting as restrictive. He also rejected suggestions that the Federal Reserve had followed financial markets, saying, "We made this decision based on an assessment of the situation."
Forecasts released after the meeting indicate that real GDP will grow by 2.3 percent this year and 2.4 percent next year. The projected PCE rate for this year is 3.7 percent and for next year is 3.2 percent.
Warsh also attributed the increase in long-term Treasury yields to stronger economic activity, increased competition for capital, and geopolitical tensions. The Federal Reserve has also formed a working group on artificial intelligence, which is expected to report by the end of this year on the impacts of this technology on the economy and monetary policy.
