The Federal Reserve on Wednesday raised its benchmark interest rate to a target range of 3.75% to 4% after holding rates steady for five straight meetings, responding to persistent inflation and a still-solid labor market.
The move, widely anticipated by markets, tested Fed Chair Kevin Warsh’s resistance to political pressure from President Donald Trump, who has pushed for lower rates despite elevated inflation. For housing professionals, early reactions suggest the hike may not immediately translate into worse lending conditions, although affordability remains strained.
Fed officials entered the meeting with data showing consumer prices running hotter than ideal. The Consumer Price Index (CPI) rose 0.4% month over month in August, up from a 0.1% gain in July, driven largely by a 3.9% increase in gasoline prices. On an annual basis, inflation was up 3.4% in August.
The labor market also remained firm, with the U.S. adding 162,000 jobs in August and the unemployment rate holding at 4.1%.
The Federal Open Market Committee approved the hike in a unanimous 12-0 decision.
“The Committee is continuing its policy of maintaining ample reserves in the banking system. Economic activity is expanding at a solid pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient,” the FOMC said in a statement.
“Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little. Inflation remains elevated. Today’s policy action will support a timelier return to the Committee’s 2 percent goal. The Committee will deliver price stability.”
“Inflation figures are not falling further. In fact, if anything, especially with oil prices and the pressures from the Middle East, it looks like we could be seeing a rise in inflation going forward,” said Todd Bitter, national director of sales at NEXA Lending. “If the Fed doesn’t get in front of it, it’s going to get out of their control. It’s going to make things worse.”
The likelihood of a 25-basis-point increase had climbed above 90% heading into the meeting, according to the CME Group’s FedWatch tool. Analysts noted the Fed has not typically held rates when the implied probability of a hike is that high.
The odds were 59% a week ago and 33% a month ago. They were boosted by Warsh’s hawkish speech at the Jackson Hole Economic Symposium and stronger-than-expected economic data.
Melissa Cohn, regional vice president at William Raveis Mortgage, said inflation is heading the wrong way and is likely to “get worse before it gets better.”
“The Fed needs to make sure that everyone understands that they maintain their dual mandate, and that inflation is more important right now than unemployment, because we’ve seen solid jobs numbers,” Cohn said in a statement. “They need to put a lid on inflation and raise rates.”
Start of tightening cycle?
The Fed also released its economic projections, with the Personal Consumption Expenditures (PCE) price index at3.7%(up from3.6%in June) and the unemployment rate at4.1%(down from4.3%previously).
On the policy path,18 participantssubmitted year-end federal funds rate projections:2in the3.88%–4.12%range,12in the4.13%–4.37%range, and4in the4.38%–4.62%range, indicating most of them expect more rate hikes ahead.
But Wednesday’s move raises the question of how much further the Fed will go if inflation remains above its 2% annual target. Markets are pricing roughly 100 basis points of additional tightening over the next year, according to research from Bank of America Securities.
“We remain comfortable with our view that the Fed will raise rates a bit less (75 bps), but much faster (by the end of 2026),” Stephen Juneau, senior U.S. economist at BofA Securities, wrote Tuesday. “Moving quickly would give the Fed a better chance of i) getting underlying inflation back to target, and ii) keeping a lid on long-end rates. This should allow for less tightening in aggregate.”
HousingWire Lead Analyst Logan Mohtashami wrote Tuesday that the current inflation backdrop is being shaped by forces beyond the Fed’s direct control.
“Now the inflation story would look different with no trade war and no Iran conflict,” Mohtashami wrote. “There’s not much you can do about the massive AI spending going into our economy, but one thing is for sure: a new Fed rate-hike cycle isn’t good for mortgage rates unless the economy slows down or we get resolution on the two things above that we can control.”
Impacts on housing
Housing industry executives stressed that the Fed’s move does not directly impact mortgage rates.
“Wednesday’s move does not necessarily translate into an increase in mortgage rates, which are more closely tied to longer-term Treasury yields and have already absorbed some expectations for tighter monetary policy,” Charles Goodwin, vice president and head of bridge and DSCR lending at Kiavi, said in a statement.
Michele Raneri, vice president and head of U.S. research and consulting at TransUnion, said the implications for mortgage borrowers may be less immediate, as mortgage rates are driven both by Fed policy signals and bond market dynamics.
“Given that bond yields continue to face many of the same pressures that drove this latest rate increase, we will be closely monitoring how that market responds in the coming weeks and whether mortgage rates see an uptick as well,” Raneri said in a statement.
But Raneri estimates that a borrower financing $389,367 (the average mortgage amount) at an average annual percentage rate (APR) of 6.78% could see their monthly payments increase by about $65 if mortgage rates move 25 basis points higher.
Another estimate, by Cohn, shows that every one-eighth of a percent higher for rates is another group of buyers that don’t qualify. In that case, “people are going to have to downsize their expectations,” she added.
Editor’s note: This is a developing story and will be updated with more information.