The Federal Reserve on Wednesday raised its benchmark interest rate for the first time in over three years amid concerns over stubborn inflation that has been driven recently by higher energy prices.Fed policymakers voted 12-0 to raise the federal funds rate from a range of 3.5% to 3.75% to a new target rate of 3.75% to 4%. The 25-basis-point increase marks the first interest rate hike since July 2023 and comes after the Fed left rates unchanged at its first five meetings this year.The Federal Open Market Committee (FOMC), the central bank’s panel responsible for monetary policy moves, noted that “Economic activity is expanding at a solid pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient. 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% goal.”STUBBORN INFLATION SETS STAGE FOR FEDERAL RESERVE TO HIKE INTEREST RATESThe FOMC’s rate hike announcement was accompanied by a summary of economic projections made by policymakers. The median member of the panel projected one more 25-basis-point rate hike this year on the so-called “dot plot” as the FOMC is set to meet again in October and December, when further moves could occur. The median projection also expects the federal funds rate to remain around that level next year.Fed Chair Kevin Warsh said the FOMC raised interest rates in support of its dual mandate to ensure price stability and promote full employment in the economy, saying that the panel “will deliver price stability.””Our decision comes at a time when the American economy appears to be strengthening,” Warsh said, noting labor market data, private sector earnings and capital investment as indicators of that strength. “I would be hard-pressed to describe broad financial conditions as restrictive.”The Fed chair noted that the unemployment rate remains low at around 4.1%, with job openings and weekly hours rising, so the “labor side of the Fed’s congressional remit is in good shape.””Yet for more than five years, inflation has been running above target. So our predominant focus is on the price stability side of our mandate. The plain fact is that inflation is too high and has been for too long. This summer’s inflation readings do not tell me that underlying trends have meaningfully improved,” he said.WHAT WARSH’S JACKSON HOLE SPEECH SIGNALS ABOUT WHERE INTEREST RATES ARE HEADEDWarsh noted that the likely change in the personal consumption expenditures (PCE) index — the Fed’s preferred inflation gauge — was likely around 3.6% in August, well above the 2% target, while core PCE and core consumer price index (CPI) data are running at about 3.2% and 2.4%, respectively.”We at the Fed are unwavering in our vital and straightforward purpose, full employment and price stability, and a thriving American economy that sets the standard for the world,” Warsh said.FOX Business’ Edward Lawrence asked Warsh if this was a market-led rate hike, given the odds of a rate hike were about 90% in the market’s view. The Fed chair replied that “sometimes the market tries to prejudge our outcomes, I’ll observe market prices and see what they have to say, but today was our decision.”Warsh was asked about what prompted the central bank to move after holding steady at its previous meeting seven weeks ago and pointed to three things.He said improvements in the labor market led to the judgment that the economy is strengthening, adding that he hasn’t seen improvement in trends related to inflation and that geopolitical developments factored in, saying that “there’s no hiding from hot spots around the world.”TREASURY TO BUY BACK UP TO $6B IN LONGER-TERM DEBT AS BOND YIELDS HIT HIGHEST LEVEL SINCE 2023The issue of higher yields on longer-term U.S. Treasurys in recent weeks came up during the news conference with the 10-year Treasury note yield around 5%, the highest since 2023.”I would say these things tend to be overdetermined,” Warsh said. “This is a complicated set of things that are affecting the most important asset anywhere in the world, the 10-year Treasury. It’s the risk-free asset upon which every price of virtually every asset in the world is related to. So, I’ll say three things.”The first is economic strength. I think part of the reason why we’ve seen, over the course of 2026, long-term yields go up, is the economy has strengthened. Second reason: competition for capital. The surge in capital expenditures, which I referenced in my remarks, is real, and the so-called hyperscalers are out in the market raising funding. And, so, the competition for capital is real, and I think it partly explains the increase in yields.”The third is geopolitics. The situation in hot spots around the world are driving long-term yields. It’s not simply spot prices of energy, or spot prices for corn or soybeans or what, but it’s the differences between those spot prices and so-called crack spreads. What that means for products that find their way into stores across the country,” he said. “I think those are the three leading explanations, but certainly not an exclusive list.”CONSUMER PRICES REMAINED ELEVATED IN AUGUST AHEAD OF FED’S NEXT MEETINGKay Haigh, global head and CIO of fixed income and liquidity solutions at Goldman Sachs Asset Management, said the “Fed has signaled it does not at this stage envisage an aggressive tightening cycle.” “Most FOMC members see a total of two hikes this year, per the SEP, and it will likely skip October’s meeting given its proximity to the midterm elections. One more hike this year in December is our base case, although this remains contingent on upcoming CPI reports and the path of energy prices,” Haigh added.Seema Shah, chief global strategist at Principal Asset Management, said the “Fed has finally begun its hiking cycle, and the debate now shifts from whether rates will rise again to how many hikes lie ahead.” “The unanimous vote shows that rising energy prices and stubborn inflation have brought even the doves on board, making a one-and-done move highly unlikely. With markets already pricing multiple increases, policymakers will probably need to deliver at least one more hike to safeguard credibility,” Shah added.The FOMC is scheduled to hold its next interest rate meeting Oct. 27-28. The CME FedWatch tool shows a 49% chance of the Fed holding rates at the new target range of 3.75% to 4%, and a 51% probability of a 25-basis-point hike.Its subsequent meeting will be on Dec. 8-9, when the tool shows a 49.5% chance that the federal funds rate will be 25 basis points higher and a 38.2% probability of a second 25 basis point hike to a range of 4.25% to 4.5%. It also reflects a 12.3% chance of the Fed leaving rates unchanged for the next two meetings.GET FOX BUSINESS ON THE GO BY CLICKING HEREStocks sank following the Fed’s rate hike announcement. The benchmark S&P 500 Index was down about 0.5%, while the Dow Jones Industrial Average was down 1.3% in late afternoon trading. The Nasdaq Composite was little changed but down slightly with a decline of 0.08%.