Federal Reserve hikes rates 25bps for first time in three years under Chair Kevin Warsh

Federal Reserve Raises Rates 25bps Under Kevin Warsh

The Federal Reserve hiked its benchmark interest rate by 25 basis points to between 3.75% and 4%—the first increase in three years—under new Chair Kevin Warsh. Most officials penciled in at least one additional rate hike before year-end, with the September dot plot showing four policymakers now expecting two more hikes (up from one previously). Twelve officials see one more hike this year, while two expect rates to hold at the new level.

Warsh followed through on a May pledge to arrest the Fed's miss of its 2% inflation target, a shortfall now in its sixth year. The hike reverses a narrative that Trump and allies had constructed around Warsh's appointment in January—that he opposed rate increases. The move contradicts earlier criticism from Trump, who said last year he would have cut rates sooner than the Fed ultimately did.

The inflation backdrop shifted between meetings. In June, half the Fed committee expected to hold or cut rates. Since then, the Iran war has reignited energy prices, and the AI investment boom has sustained demand and inflationary pressure despite three rate cuts last year meant to guard against labor market weakness. Former New York Fed President William Dudley pinpointed the energy shock as the biggest change to the Fed's outlook, overshadowing month-to-month inflation volatility.

Warsh submitted no dot projection, leaving his own rate path implicit—a choice the transcript notes as a potential statement in itself.

The signal to Silicon Valley is crisp but mixed. The conventional wisdom from tech investors held that growth only works at zero interest rates, suggesting the AI boom would pause once rates moved higher. But companies have kept building and investing despite rising borrowing costs, suggesting that narrative has broken down. The dynamics that benefited low-rate-era fintech—companies borrowing at near-zero and lending at wide spreads—no longer work; early-stage borrowers now face 12% or higher rates, compressing returns for lenders reliant on carry arbitrage. Some fintech models may benefit from higher rates (savings products with wider spreads), but debt-heavy strategies face structural headwinds.