Federal Reserve Bank raises short-term interest rates

San José, CA – On Wednesday, September 16, the Federal Reserve Bank, widely called the Fed, raised short-term interest rates by one quarter of one percent (0.25%). The Federal Funds Rate, or the interest rate for overnight loans between banks, is now in a range of 3.75% to 4%.

The main concern of the Federal Reserve is that the inflation rate has gone up from the beginning of Trump’s term. In February of 2025, the Consumer Price Index, or CPI, the most widely used measure of inflation, saw average prices up 2.4% from a year earlier. But as of August 2026, average prices were up 3.4% from a year earlier, up about 1% since Trump’s second term began.

The increase in inflation has outpaced wage increases, so that the purchasing power of wages has gone down for five months in a row. This is feeding the so-called “affordability crisis” where more people are unable to make ends meet. To get by, credit card debt has risen every month for the last year. More and more people are working side gigs such as Uber or Lyft driving, street vending, etc.

The Fed is trying to bring down inflation by reducing borrowing and spending by businesses and consumers. A drop in total demand will tend to bring down the rate of inflation. A problem is that in most cases, this goes too far, and the economy ends up in a recession.

The Fed faces four obstacles to bringing down inflation by raising interest rates, because this policy does not address the fundamental reasons that inflation has been on the upswing during the second Trump administration.

The first cause of higher inflation was Trump’s trade war, with higher tariffs and import restrictions that began April 2, when he imposed higher tariffs on almost every country in the world, including some places where no humans live. While Trump hasn’t followed through on some tariffs, has made deals with some countries, and often had his tariffs ruled illegal by federal courts, including the U.S. Supreme court, the average tariff across all countries has gone from about 2.3% when he took office in January of 2025, to about 11% today, almost a five-fold increase. This can directly increase the price of imported consumer goods, as well as increase the price of goods made in the United States with imported parts. The Fed’s move on interest rates has no impact on tariffs.

A second big cause of rising inflation is the current war on Iran, which began on February 28, 2026, when the United States and Israel launched a massive attack using missiles and stealth bombers on the Iranian military and top leadership, including Supreme Leader Ali Khamenei and his family. Iran struck back, closing the strait of Hormuz, where about 20% of the world’s oil consumption passes through. Oil prices shot up from about $70 a barrel to as much as $120 a barrel, and it is back above $100 a barrel, or up about 50% after more than six months of war.

Because of this, gasoline, diesel fuel and other petroleum products also shot up in price. Not only did the raw material, oil, go up in price, but the “crack spread” or margin between the oil used and the price at the pump also went up, pushing oil company profits to record highs. The price of diesel fuel is at an all-time high of $6.40 a gallon (national average price), up almost 75% from a year ago.

While most households do not put diesel in their cars, the trucks that move the vast majority of goods in the United States do run on diesel, pushing up the cost of anything that has to be shipped. Farm and construction equipment also mainly run on diesel. Farmers are especially hard hit, with many of their crops affected by Trump’s trade war as other countries, especially China, are buying more from other countries and less from U.S. farmers. Prices of fertilizer are also rising because of the Iran war and tariffs.

Rising interest rates will not slow the war in Iran, but it does increase the cost of borrowing. Federal spending on interest on the U.S. government debt is about a trillion dollars a year and bigger than direct U.S. military spending.

A third cause of rising inflation is the AI (artificial intelligence) building boom of data centers. While much of the local opposition to these data centers is because of rising electricity prices and concerns over water supplies, the AI boom is also driving up the prices of semiconductors that are also used in cars and consumer electronics such as cellphones. Again, higher interest rates will not slow the AI race as U.S. companies try to outdo each other.

Even if the Fed did succeed in slowing down tech companies’ investment in AI, a slowdown in businesses’ spending on new buildings and equipment is one of the two most common triggers for a recession, the other being a sharp slowdown in construction of new homes and apartments.

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