The US Federal Reserve made its latest interest rate decision on Wednesday (September 16), opting to increase the target range to 3.75 to 4 percent in its first hike in more than three years.
In a statement, Fed Chair Kevin Warsh said that while the job market remains robust and economic activity continues to expand at a solid pace, uncertainty remains elevated due to geopolitical developments.
The benchmark rate rise is meant to deliver price stability by bringing inflation closer to the Fed’s 2 percent target.
Inflation has been growing since the start of the year due to tariffs and higher global energy prices. Oil prices have been elevated since the start of the Iran war, which has constrained traffic through the Strait of Hormuz.
Warsh said the personal consumption expenditures price index, the Fed’s preferred inflation measure, stands at 3.7 percent on an annual basis, and noted that underlying trends have not meaningfully improved.
While the Fed chair stood by his decision not to offer his own forward-looking projections, he did summarize the outlook from other Fed officials. They expect US gross domestic product to rise 2.3 percent this year and 2.4 percent next year, with inflation reaching 3.7 percent this year before falling to 2.3 percent in 2027.
The median projection for the federal funds rate stands at 4.1 percent for the end of 2026, and it is expected to remain at that level throughout 2027.
Energy prices critical to inflation
One of the primary contributors to sticky inflation is energy inputs.
Oil prices have been elevated since late February due to the Middle East conflict. Although shipping through the Strait of Hormuz briefly increased in June, it has since fallen back to near zero.
Additionally, Iran-backed Houthi forces have gained control of key portions of the Red Sea.
This move is part of an escalating conflict between the Houthis and Saudi Arabian forces that led to the shutdown of a key oil pipeline that bypassed the Strait of Hormuz. Saudi Arabia has resorted to selling spot oil in ship-to-ship transfers in the Gulf of Oman, allowing tankers to bypass conflict areas in the region.
On Wednesday, both West Texas Intermediate and Brent crude were trading above US$100 per barrel, while average gas prices in the US were over US$4.36 per gallon. Diesel was selling at a record average of US$6.31 per gallon.
Gold, silver prices react to Fed decision
The gold price was largely stable before the Fed’s decision, trading around US$4,353 per ounce, but quickly plunged 2.43 percent after the news to reach US$4,247.86 by 3:15 p.m. EDT.
Similarly, the silver price fell 3.4 percent, declining from US$64.80 per ounce to US$62.60.
Equities were also down, with the S&P 500 (INDEXSP:.INX) falling 0.34 percent to reach 7,559.4 at 3:00 p.m. EDT
Meanwhile, the Nasdaq-100 (INDEXNASDAQ:NDX) saw a slight bump, gaining 0.13 percent to 28,976.07, and the Dow Jones Industrial Average (INDEXDJX:.DJI) lost 1.08 percent to 51,532.73.
The Fed meets next from October 27 and 28. It will be the final gathering before US midterm elections in November.
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Securities Disclosure: I, Dean Belder, hold no direct investment interest in any company mentioned in this article.
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