The Fed Raised Rates Yesterday. Here's What I’m Watching Next.

The Federal Reserve raised its benchmark interest rate by a quarter point yesterday, its first increase since 2023. Here’s my take on what happened and what I’m going to continue to watch.

So, What Did the Fed Just Do?

In a unanimous vote, 12-0, the Federal Open Market Committee (FOMC) raised the federal funds rate by 25 basis points, moving the target range to 3.75%-4.00%. It's the first hike since the Fed wrapped up its post-pandemic tightening campaign in 2023, and officials' own projections point to at least one more increase before year-end.

I think the committee got this one right. 

Why Is Inflation Heating Up Again?

This is the part I want clients to understand clearly: Energy markets are under real strain. Oil, and diesel in particular, have surged as conflict in the Middle East disrupts supply. Diesel powers the trucks and trains that move nearly everything we buy, so those costs work their way into the price of just about everything else.

This may remind you of the inflation surge from a few years ago, and it should. Both were caused by a supply shock, not an overheating economy. During COVID, supply chains were damaged when Russia invaded Ukraine and when China imposed a zero-tolerance policy that kept workers sidelined. Yesterday’s shock is different in cause but similar in effect: diesel and other distillates are simply less available, and that scarcity is pushing prices up.

Here's why that history matters: last time, the Fed held rates near zero for too long rather than raise them against a shock it couldn't control. Inflation eventually hit 9%, and by the time the Fed responded, it was playing catch-up. I don't think that mistake is repeating itself. 

"Yesterday's vote suggests this Fed learned that lesson—it's moving early rather than waiting to see if a supply shock turns into something worse."

What About the Pressure From the White House?

This hike didn't happen in a vacuum. The White House has pushed publicly for lower rates, with President Trump recently threatening to halt trade with any country the U.S. runs a deficit with unless the Fed cuts. Fed Chair Kevin Warsh moved ahead with a hike anyway.

My take: Kevin Warsh stuck to his guns and did what almost everybody else was concluding was the right thing to do. There are still some voices advocating for lower interest rates, but most people worried about long-term inflation felt like raising rates now was the best way to contain it.

Markets have taken it in stride so far, and are even rallying, but I’m not ready to call this settled yet. If the White House escalates its response, or if Warsh signals another hike coming later this year, this could get more complicated before it gets simpler.

Is This Over?

There’s two areas worth watching beyond stocks: a stronger dollar, which tends to follow higher rates, and pressure on crypto, which has been up and down since the announcement.

Sometimes the market takes a day or two to decide what it's going to do. In other words: don't read too much into any single day's reaction, including today's.

TLDR;

The Fed raised rates a quarter point today in a unanimous decision, 12-0, its first hike since 2023, driven by energy-related inflation rather than an overheating economy. It's a sign the current Fed may be more willing to act early than its predecessor was. But with political pressure mounting and at least one more hike potentially on the table this year, BIP will be watching closely for what comes next. If your portfolio needs a closer look given the environment, reach out to us to connect with a BIP Personal Wealth advisor.

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