Federal Reserve Raises Interest Rates To Reduce Inflation

At their regular meeting of September 16, the Federal Reserve’s Federal Open Market Committee (FOMC) voted to raise interest rates by 25 basis points to a range of 3.75%-4.00% to reduce persistently high inflation. The decision was unanimous, which was a departure from recent FOMC decisions that were mixed. This is the first increase in interest rates in over three years, since July, 2023.

The Federal Reserve System (Fed) has a dual mandate of maintaining full employment and keeping inflation close to 2.0%. Here is where the Fed stands regarding that dual mandate:

FULL EMPLOYMENT

It is a widespread opinion among economists that full employment is achieved when the unemployment rate is between 4% and 5%. This level of unemployment provides a necessary flexibility in the job market to enable promotions, job changes, etc. Whether resulting from action by the Fed or other reasons, we have been experiencing full employment during 2026. This enables the Fed to concentrate on the goal of reducing inflation.

2026 UNEMPLOYMENT RATES

Source: U. S. Bureau of Labor Statistics

INFLATION, 2.00% GOAL

During the last few years, the goal of a 2.00% annual inflation rate has been an elusive one. Then early in 2026 it appeared that we were on our way to accomplish that goal, as inflation rates were held to a low 2.4% in both January and February. This happened without intervention by the Fed.

Then in February, the Iran war created a major interruption in the supply of oil, which led to extremely high fuel costs and major increases in the rate of inflation.

While inflation has come down from the May high of 4.2%, it has remained consistently above 3.0%, with no sign of improvement.

Generally, the Fed tends to ignore what is perceived as temporary setbacks, like a sudden spike in fuel costs. However, after six months, the current high fuel cost is showing signs of being long term. This has led to a clamor from the public for the Fed to “do something”, which the Fed did on September 16.

2026 INFLATION NUMBERS

(*) core inflation is calculated omitting food and energy prices. Source: U. S. Bureau of Labor Statistics

While the reaction to the interest rate increase was generally well received, there were some notable exceptions.

President Trump, who has spent more than a year calling for lower rates, posted on Truth Social that rates should be dropping and that the trade deficit was a reason to “LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!”

The organization Investopedia, which was founded in 1999 with the mission of helping people understand money and make better financial decisions, had this to say about the Fed’s higher interest rate.

“Higher interest rates won’t directly address the main drivers of the current wave of inflation: high oil prices from the war in Iran, tariffs, and the AI investment boom”.

Assessing the effect of tariffs and the AI investment boom is difficult because they have been in play for a while. However, even the most casual of observers are likely to see the correlation between higher inflation rates and the war in Iran.

The folks at Investopedia are in sync with established economic doctrine, which states that there are three major factors that tend to cause inflation.

Demand-pull: Caused by demand for goods and services that exceeds the supply.

Cost-push: Caused by higher costs of production (like higher wages or higher oil prices), which then get passed on to consumers as higher prices.

Government policies: They include taxation, fiscal policy, government spending, and many others.

The type of inflation most receptive to Federal Reserve monetary policy is that caused by demand-pull, but this appears to be the least influential cause of the current high inflation situation.

Cost-push, fed by higher fuel costs, seems to be the greatest driving force behind our current inflation rate. Until government policy results in the restoration of unimpeded oil flow, we are not likely to see a significant reduction in our inflation rate.