The United States has taken a significant step by increasing its benchmark interest rate by 25 basis points, marking the first increase since 2023. This decision was made following persistent inflationary pressures and changing economic conditions.
Details of the Federal Open Market Committee Decision
The Federal Open Market Committee (FOMC) raised the target range for the federal funds rate by a quarter percentage point to 3.75 to 4 percent. This decision was approved with a unanimous 12-0 vote. The rate hike was generally in line with market expectations, with traders predicting over a 90 percent chance of a 25 basis point increase.
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The FOMC stated in its monetary policy announcement: "The committee decided to raise the target range for the federal funds rate by a quarter percentage point to 3.75 to 4 percent to support the Federal Reserve's two missions."
Impacts on Inflation and Economic Activity
The Federal Reserve announced that inflation remains elevated, and the recent policy action is aimed at supporting a quicker return to the institution's 2 percent inflation target. In this regard, the Federal Reserve stated: "Today's policy action will help return to the committee's 2 percent target. The committee will ensure price stability."
The Federal Reserve added that economic activity in the United States is expanding at a solid pace, although uncertainties stemming from geopolitical developments persist. Domestic spending remains strong, and robust productivity growth and investment are also evident. Job additions are consistent with labor force growth, and the unemployment rate shows little change.
In line with this decision, the Federal Reserve Board voted unanimously to raise the interest rate paid on reserve balances to 3.90 percent, effective September 17. Additionally, the FOMC directed the Federal Reserve Bank of New York to conduct the necessary operations to maintain the federal funds rate within the new target range.
The overnight reverse repurchase agreement rate was set at 4 percent, and the overnight reverse repurchase agreement bid rate was set at 3.75 percent. Furthermore, the daily limit for each counterparty in this agreement was set at $160 billion.
Increase in the Primary Credit Rate
In another related decision, the Federal Reserve Board also approved a 25 basis point increase in the primary credit rate to 4 percent, which will also take effect on September 17. The primary credit rate is the interest rate charged to eligible banks that borrow directly from the Federal Reserve.
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