Federal Reserve policymakers have raised the benchmark interest rate for the first time in three years in response to pernicious inflation, defying President Donald Trump’s insistent calls for lower borrowing costs.
Fed Chairman Kevin Warsh joined the unanimous the Federal Open Market Committee on Wednesday, voting to raise the federal funds rate by a quarter percentage point. The move brings the overnight rate to a range of 3.75% to 4%, its highest level since last fall.
The decision marks a stunning reversal in outlook for the central bank, which as recently as March had been expected to cut interest rates this year. But soaring energy prices, fueled by the disruption in oil trade during Trump’s war with Iran, have left Fed policymakers faced with a new inflation crisis.
Markets now expect the Fed to raise rates again once more before the end of the year. Mortgage rates have already risen sharply in anticipation of the policy change, climbing quickly toward 7% this month after hitting a three-year low of 5.98% in late February.
The rate hike may put Warsh in the crosshairs of Trump, who has persistently called for lower rates and publicly clashed with former Fed Chair Jerome Powell over rate policy.
On Sunday, while attending the Irish Open golf tournament, Trump said: “The United States is so strong, we should be paying the lowest interest rate in the world.”
Warsh, handpicked by Trump to lead the central bank, had also called for lower rates before starting the job in May. But Warsh has faced mounting concerns on the FOMC that inflation could spiral out of control again if monetary policy isn’t tightened.
The Fed uses higher interest rates to fight inflation and lower rates to stimulate the job market, in line with the central bank’s mandate of maintaining price stability and maximum employment. The Fed doesn’t directly set mortgage rates, which instead move in response to the bond market.
In recent weeks, the bond market has been beset by turmoil, with the yield on the key 10-year Treasury surging above 5% to nearly a 20-year high. That move reflects investor fears about inflation, growing federal deficits, and concerns about the Warsh Fed’s willingness to defy Trump and raise rates if necessary.
The 10-year Treasury yield is a key benchmark for mortgage rates, as the typical 30-year home loan is typically refinanced or closed through a home sale at around the 10-year mark. And mortgage rates show no sign of easing after hitting a 15-month high last month.
Mortgage rates averaged 6.76% last week, according to Freddie Mac. That’s the highest in 15 months, and rising rates have already put a dent in home sales for August, the latest data shows.
Existing-home sales plunged to a 14-month low in August, dipping below 4 million annualized for the first time since June 2025. And pending sales also retreated last month, snapping an eight-month growth streak, Realtor.com data shows.
Keith Griffith is a senior news editor at Realtor.com covering housing policy, real estate news, and trends in the residential market. Previously, his work has appeared in Business Insider, The Street, Chicago Sun-Times, New York Post, and Daily Mail, among other publications. He has a master’s degree in economic and business journalism from Columbia University.
