Fed raises US interest rates by 0.25%

Leanna Byrne (0:00)

America's Central Bank raises interest rates for the first time in three years.

Kevin Warsh (0:05)

The decision we made today was a sober decision, serious decision, responsible decision.

Leanna Byrne (0:11)

It's World Business Report from the BBC World Service. I'm Leanna Byrne. The Federal Reserve has raised rates by a quarter of a percentage point and signaled borrowing costs could climb again before the end of the year. Also, Canada could be getting a new relationship status with Europe, as Brussels backs plans to make it the EU's first associate member. And when your name is at the top of the poster, can you really say it wasn't your decision? We'll look at the reputational fallout for Ed Sheeran after Macklemore was dropped from his US tour.

Yeah, so for the first time in more than three years, the US Federal Reserve has raised interest rates. It's a big change in direction as it tries to bring stubborn price rises back under control. The Fed lifted its benchmark rate by a quarter of a percentage point to a range of 3.75 to 4 percent. And that's despite repeated calls from President Trump for borrowing costs to come down. Federal Reserve Chair Kevin Warsh explained why he and his fellow policy makers decided now was the time to act.

Kevin Warsh (1:18)

The decision we made today was a sober decision, serious decision, responsible decision. One that we have been preparing for and thinking about in my 110 or 20 days here.

Leanna Byrne (1:30)

A little earlier, I spoke to our business correspondent, Samir Hussein, who was covering the story on Wall Street.

Samir Hussein (1:35)

The Fed did what it was expected to do, that it raised interest rates by a quarter of a percentage point, and it cited the high inflation as being the real driving factor. What was interesting was in the press conference, the Fed Chair, Kevin Warsh, made it really clear that the US economy is doing well, especially things like the labor market and consumer spending, despite these geopolitical developments, as he referred to it, presumably talking about the war with Iran, because we've seen a dramatic increase in inflation here in the United States as a result of the war and the high energy costs.

Leanna Byrne (2:17)

And what do you think? Does this look like a one-off rise, or should Americans be preparing for rates to go higher again?

Samir Hussein (2:23)

I think if you look at what the committee members were saying, they've kind of signaled that most of them believe this is just one of two rate hugs that are going to come this year, that we're possibly going to see another rate hike before the end of the year. And I think that really goes to show just how much of a concern that the Federal Committee sees inflation as, that look, we didn't see this rate hike at the last meeting. I think that took some people by surprise. This meeting, we see that it's an absolute unanimous decision, which also was a bit surprising. There was a possibility of one or two Federal Reserve board members that may have voted against a rate hike. But now not only are we seeing it was unanimous this time around, but we're probably going to see another one before the end of the year.

Leanna Byrne (3:14)

And then there's another dimension to this, isn't there? Donald Trump has been calling for lower interest rates. So what is he going to think about this?

Samir Hussein (3:21)

Well, presumably if he has been calling for lower interest rates, and his particular pick for the head of the Federal Reserve did not deliver on what it is that he wanted, he's probably not going to appreciate it. But we've heard from one member of the White House already alluding to the decision and saying it was unfortunate, but there hasn't been any direct reaction from the president just yet.

Leanna Byrne (3:47)

That was our business correspondent, Samir Hussein. He was covering the story on Wall Street, speaking to me a little earlier. With me now is Susan Schmitt, Portfolio Manager and Exchange Capital Resources in Chicago. Susan, hello.

Susan Schmitt (4:00)

Hello.

Leanna Byrne (4:00)

So markets were expecting this move, and then US markets have closed to the six-week low. So where's that coming from? Is it the move for the rate hike itself, or is it something Kevin Warsh said?

Susan Schmitt (4:12)

No, well, that's the problem. Kevin Warsh doesn't say anything. So the investors are still trying to figure out this adjustment between a very transparent former Fed Chairman, Chairman Powell, to Kevin Warsh's style. So Chairman Warsh doesn't like to reveal what he's thinking. He doesn't want to give any future indication and possibility of what path they might take. So I think investors are having a hard time trying to parse the data. Now, unfortunately for Chairman Warsh, his fellow Fed members are still speaking out publicly.