The backdrop in which the U.S. Fed raised interest rate, Pg7

Key Highlights:

• The U.S. Federal Reserve raised its short-term interest rate, the federal funds rate, by 25 basis points on September 16, marking the first increase in three years.
• The rate moved from a range of 3.5%-3.75% to 3.75%-4%.
• The decision by the Federal Open Market Committee, led by Chair Kevin Warsh, aimed to combat persistent inflation.
• U.S. inflation, measured by the Consumer Price Index, stood at 3.4% in August, remaining above the Federal Reserve's 2% target.
• The increase in interest rates occurred amidst rising U.S. public debt and increasing 10-year U.S. Treasury bond yields.

US Fed Reserve Rate Hike.jpg

Detailed Insights:

• The federal funds rate is broadly comparable to the Reserve Bank of India's repo rate, serving as a key policy tool.
• The rate hike was influenced by inflation, which surged after the U.S.-Israel war with Iran began in February.
• Inflation peaked at 4.2% in May before declining to 3.4% in August, still exceeding the Federal Reserve's target measured by the Personal Consumption Expenditures (PCE) price index.
• Long-term bond yields, including the 10-year U.S. Treasury bond, crossed 5% on September 14, driven by inflation fears and government borrowing.
• The U.S. public debt-to-GDP ratio reached 122.6% in the first quarter of 2026, nearly double what it was two decades prior.
• The cost of servicing the U.S. government's debt now surpasses its spending on Medicare, health, and defense.
• The Stockholm International Peace Research Institute notes that U.S. defense spending accounts for one-third of global military expenditure.

Key Concepts Involved:

• Federal Funds Rate: The target interest rate set by the Federal Open Market Committee for overnight borrowing and lending between banks.
• Inflation: The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.
• Consumer Price Index (CPI): A measure that examines the weighted average of prices of a basket of consumer goods and services, used to gauge inflation.
• Personal Consumption Expenditures (PCE) Price Index: A measure of the prices of goods and services purchased by consumers, used by the Federal Reserve as its primary inflation gauge.