Explanation of the reason behind the U.S. Federal Reserve raising interest rates

The Federal Reserve, the US central bank and monetary authority, is gearing up for its next meeting on September 17, 2025. The Federal Open Market Committee (FOMC), which consists of the Federal Reserve's Board of Governors and a rotating group of regional bank presidents, will review economic and financial conditions, determine the appropriate stance of monetary policy, and assess the risks to its long-run goals.

Established in 1913, the Federal Reserve plays a crucial role in regulating monetary policy and the financial system. It controls bank reserves and interest rates, primarily through buying and selling US Treasury bonds. This helps to influence the money supply and set the tone for economic growth.

The current Fed Chair, Jerome Powell, took the helm in 2018. In recent times, the Fed has been navigating a challenging economic landscape marked by high inflation and potential banking crises.

In March 2023, the inflation rate was 5 percent, a marked decrease from the previous year but still significantly higher than historical norms. In comparison, the inflation rate in March 2022 was 8.5 percent, far above previous years' rates.

In response to these economic conditions, the Fed has raised interest rates by 4.75 percentage points since March 2022, with the largest single increase of 75 basis points in June 2022. However, the Fed no longer states that ongoing rate increases will be appropriate to quell inflation. Instead, it anticipates that some additional policy firming may be necessary to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.

The current banking crisis in the US has caused the Fed to consider the potential for a recession by the end of the year. Chair Powell has noted during a press conference that events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes.

The Fed's March statement gives some clues about what it may do at the remaining meetings in 2023. The Fed has a dual mandate: to achieve stable prices and stable employment. High inflation and high unemployment are two of the biggest threats to monetary stability that the Fed watches for.

The FOMC holds eight meetings per year, and several more are scheduled for 2023. The next meeting, on September 17, 2025, will be a crucial opportunity for the Fed to reassess its monetary policy stance and make decisions that aim to balance the needs of stable prices and stable employment in the face of ongoing economic challenges.