The Fed raised its rate: what’s behind the decision and why it concerns the whole world

Even the Fed Chair he appointed, Kevin Warsh, ultimately acts not according to political expediency but on the basis of the regulator’s mandate—to ensure price stability.

To understand the logic of this step, it is worth recalling why central banks raise rates at all. The key rate is the price at which banks borrow money from the regulator. The higher it is, the more expensive loans become for businesses and households; the more slowly spending grows and, accordingly, the lower the inflationary pressure in the economy. In essence, it is a kind of brake for an overheated economy.

Annual inflation in the United States is holding at 3.4% against the Fed’s official target of 2%. The main catalyst for the acceleration in price growth was the energy crisis. Because of a sharp drop in oil shipments through the Strait of Hormuz, caused by an escalation in the Middle East, the price of gasoline in August rose by 27.4%. Given that fuel is included in the cost structure of virtually all goods and services, the consequences of higher raw-material prices spread across all sectors of the economy.

The Fed can act boldly because the labor market remains stable. In August, the number of new job openings increased by 162 thousand—three times the experts’ expectations, who had projected growth of only 56 thousand. The unemployment rate, meanwhile, stayed at the same level of 4.1%, which is considered quite acceptable. As long as employment shows no signs of deterioration, the regulator can focus its efforts on curbing inflation without worrying that more expensive credit will immediately trigger a rise in unemployment.

The Fed’s ability to act decisively is enabled by the resilience of the labor market: in August, the number of new jobs rose by 162 thousand—three times more than analysts’ forecasts, which had expected an increase of only 56 thousand—and unemployment remained at a comfortable 4.1%. As long as employment does not show signs of deterioration, the regulator can concentrate on fighting inflation without fearing that more expensive money will immediately provoke a spike in unemployment. In addition, the Fed’s assessment of U.S. GDP growth has become more optimistic: it now forecasts 2.3% in 2026, whereas previously it had spoken of 2.2%. This confirms that the economy is successfully withstanding tighter monetary conditions. At the same time, the regulator clearly indicated that the series of increases is most likely not over: by the end of this year, the rate may well reach the 4–4.25% range.

The significance of this decision goes far beyond the American economy. A higher rate makes the dollar more attractive to global investors because yields on dollar-denominated assets rise, and capital flows to where it generates greater returns. For the rest of the world, this results in weaker national currencies against the dollar, more expensive servicing of dollar debts, and higher import prices—above all for commodities—since a significant share of world trade, including oil, is denominated in dollars. Consequently, the Federal Reserve’s decision is not an exclusively domestic U.S. event; it is one of the few economic instruments whose influence extends to virtually all global processes.

Author: PhD in Economics, Associate Professor of the Department of World Economy and World Finance, Financial University under the Government of the Russian Federation Tatyana Aleksandrovna Gorbacheva.