The Federal Reserve on Wednesday carried out its first interest rate increase in more than three years and signaled that another hike is on the way, as part of an effort aimed at combating inflation driven by soaring oil prices and other factors.

In a move that markets widely anticipated, the central bank’s Federal Open Market Committee voted 12-0 to raise its key interest rate by a quarter percentage point, or 25 basis points. The move brought the overnight funds rate to a target range of 3.75%-4%.

“Inflation remains elevated,” the committee said in its brief post-meeting statement. “Today’s policy action will support a timelier return to the Committee’s 2 percent goal. The Committee will deliver price stability.”

During a news conference, Chairman Kevin Warsh said inflation has been “too high … for too long.”

“We must be confident that underlying inflation is moving to our objective clearly and at sufficient speed,” he said. “Today, the FOMC decided that this standard has not been satisfied.”

Warsh further explained that recent economic reports showed the economy, including the labor market, was strong. However, inflation remained above the central bank’s target, and added that tension in the Middle East also contributed to the decision.

“All three of those things lend themselves to a firm unanimous decision today,” he said.

Highly anticipated

Despite a raft of conflicting recent statements from policymakers, markets had priced in a better than 90% chance that the FOMC would approve the increase, though there was chatter about the possibility of multiple dissents.

Persistently high inflation readings coupled with statements from Warsh a few weeks ago had convinced Wall Street that the Fed would OK its first rate increase since July 2023.

Updated projections the committee released Wednesday showed that a strong majority of officials think another hike is possible later this year.

The dot-plot grid of individual officials’ expectations indicated that 16 of the 18 participants – Warsh has chosen not to submit a dot since taking the position – expected another rate increase, with four of those seeing two more as possible. Two participants expected the committee to stop at one hike.

However, there are no increases penciled in for subsequent years, with one cut each indicated for 2028 and at least one for 2029.

Officials also nudged up their expectations for inflation this year.

They see the headline personal consumption expenditures price index at 3.7% and the core excluding food and energy at 3.4%, both 0.1 percentage point higher than the last update in June. The Fed doesn’t expect to reach its inflation target until 2029, though it sees both measures dropping off sharply in 2027 – 2.3% for headline and 2.5% for core.

The committee had been on hold all year and was expected to stay there, until the tide began turning toward a hike in late August.

Fed rarely moves once

The Fed rarely only moves once, as policymakers generally eschew incremental decisions when they think inflation is too high and needs elevated rates, or when growth is too slow and the central bank tries to boost demand with lower rates.

While the Fed’s action was expected, the rationale behind the hike was unusual.

The Fed generally looks through the kind of inflation the economy is experiencing now, with the higher fuel costs from the Iran war and the lingering impacts from tariffs. However, officials in recent days have weighed the cost of continuing to look through the price increases, particularly in light of a stabilizing labor market. The committee lowered its outlook for the unemployment rate to 4.1%, down 0.2 percentage point from June.

The worry now is that the duration of the energy prices could raise inflation expectations and start to spread through the economy. Economists also see expanded investment in artificial intelligence as a potential inflationary factor.

Also, the “transitory” episode from a few years ago is still fresh in policymakers’ minds, as Fed officials thought the supply and demand shock from the Covid pandemic eventually would fade. Instead, inflation readings hit 40-year highs before the Fed decided to act.

In July, the debate generated considerable dissent on the policy view, with three FOMC members voting against the decision to hold, preferring instead a quarter-point hike.

At this week’s meeting, 2027 was a fairly close call, with eight officials pointing to another hike, six seeing the funds rate holding steady and four envisioning cuts.

Markets already have been pricing in higher rates across the spectrum. The S&P 500

Treasury yields have been surging. The 10-year note has risen about a quarter percentage point since Warsh’s remarks at the Fed’s Jackson Hole, Wyoming, symposium on Aug. 28. The benchmark is up about a full percentage point since its February low. The 2-year note, which is most sensitive to rate expectations, has seen even sharper gains.

Borrowing costs also have been on the move. A 30-year fixed-rate mortgage had soared to 7.19%, up some 38 basis points since the Jackson Hole speech and more than a full percentage point from a year ago, according to Mortgage News Daily.

In the wake of the decision, Treasury yields were lower, a signal that investors were encouraged by the central bank’s attempt to tamp down inflation. Yields and prices move in opposite directions.

“Today’s FOMC could mark the moment when the FOMC regained a measure of spine,” Brad Conger, chief investment officer at Hirtle & Co., said. “There were many arguments for standing still. But for once, the committee sided with main street.”

“Inflation is a pervasive concern, and its uncertainty is impeding decision-making among all businesses. One swallow doesn’t make a spring, but we might have just caught a glimpse of Volckerian decisiveness as opposed to the eternal sycophancy of the Powell era,” Conger added.

U.S. President Donald Trump said the nation is “hopefully” approaching the conclusion of its nearly seven-month standoff with Iran, even as hostilities intensify between Saudi Arabia and the Iran-backed Houthis in Yemen.

“Well, hopefully we are toward the end of the war. They want to make a deal, we’ll see how that works out,” Trump remarked to reporters in North Carolina on Wednesday evening.

He also noted that he had spoken directly with Tehran, without elaborating. His remarks follow the broadening of the wider Middle East conflict, which began on February 28, into Yemen, further disrupting energy shipments and unsettling oil markets.

The Houthis have increased strikes on Saudi targets and launched a swift ground offensive aiming to seize control of the Bab el-Mandeb Strait, a critical oil chokepoint linking the Red Sea to the Gulf of Aden and global trade routes.

Trump plans to meet Gulf leaders on the margins of the United Nations General Assembly in New York next Tuesday to discuss the next steps for the Iran war, according to Axios reporting on Thursday.

The report arrived as Washington’s attempts to revive ceasefire negotiations appear to have stalled, with Gulf states absorbing heightened attacks from Iran and Iran-aligned Houthi fighters in recent days.

Trump is expected to sit down with the heads of the six Gulf Cooperation Council states — Saudi Arabia, the United Arab Emirates, Qatar, Bahrain, Kuwait and Oman — and the guest list could expand to include other Arab and Muslim leaders, the Axios story noted.

The State Department issued initial invitations on Wednesday, Axios reported, citing unnamed sources familiar with the matter.

The talks will center on U.S. proposals for a post‑war strategy, Axios reported, while Trump and his senior advisors work on a day‑after plan that is unlikely to be finalized until after the November U.S. midterm elections.

Israeli Prime Minister Benjamin Netanyahu also expressed interest in meeting Trump in New York, though no meeting has been set, the report added, citing an Israeli source.

Economic costs

The latest diplomatic push emerges as Gulf states confront rising economic burdens from the conflict. Saudi Arabia closed its East‑West pipeline, a key conduit moving crude from the kingdom’s eastern coast to the Yanbu port on the Red Sea, after a drone strike damaged the line.

Oil prices fell on Thursday after Saudi Arabia reportedly arranged extra shipments via Oman’s Sohar port using ship‑to‑ship transfers, alleviating worries about a prolonged supply shortage.

International benchmark Brent

On Wednesday, U.N. Secretary‑General António Guterres renewed calls for de‑escalation in the region, urging diplomacy and the restoration of freedom of navigation through the Strait of Hormuz. It remains uncertain what Washington will demand from Gulf states or Iran after the war.

Iran might be willing to negotiate after the U.S. midterms, but continued diplomatic reluctance could prolong the conflict, warned Michael Feller, chief strategist at Geopolitical Strategy.

“Iran may be willing to do a deal after the midterms. If not, the war may continue until late 2028, if not beyond,” Feller said.

One avenue of relief would be repairing the East‑West pipeline, he added, though export terminal inventories could be depleted unless the line is restored within days.

Investors can anticipate improved returns on their cash holdings now that the Federal Reserve has raised interest rates. The central bank’s Federal Open Market Committee unanimously approved a quarter‑percentage‑point increase, bringing the federal funds rate to a target range of 3.75%–4% on Wednesday — the first hike since July 2023.

“The good news is you may see a bit more yield on your high‑yield savings accounts and certificates of deposit,” said certified financial planner Marguerita Cheng, CEO of Blue Ocean Global Wealth and a member of the Verum Financial Advisor Council.

Still, there are nuances and a range of yields to consider. Beyond high‑yield savings and CDs, investors can park cash in money‑market funds and Treasury bills. While savings accounts and CDs are FDIC‑insured, Treasurys carry the full backing of the U.S. government.

“It really comes down to: what’s the purpose for the cash and how soon do you need it?” Cheng said. “There are many options depending on your goal, time horizon, and tax bracket.”

Keep in mind that inflation can erode the real return from cash‑equivalent investments. Chris Gunster, head of fixed income at Fidelis Capital, prefers to keep clients’ cash balances minimal.

“It’s all about inflation — what you earn after inflation and taxes,” he said. “If inflation outpaces the yields on money‑market funds, you’re not coming out ahead.”

Here are several options for your cash.

**T‑bills**

T‑bills, which mature in one year or less, respond quickly to Fed rate moves, Gunster noted. Yields on already‑issued bills largely anticipated Wednesday’s hike. Investors can purchase bills directly via TreasuryDirect.gov in maturities from four to 52 weeks. Earnings are subject to federal tax but exempt from state and local taxes. There are also ETFs focused on short‑term Treasurys, such as the iShares 0‑3 Month Treasury Bond ETF (SGOV) and the SPDR Bloomberg 1‑3 Month T‑Bill ETF (BIL).

**High‑yield savings accounts**

Annual percentage yields on these accounts typically track the federal funds rate, though bank‑specific factors like deposit demand also play a role. Each institution sets its own rates.

“Updates from bank management teams this week — none materially changed net interest income guidance — and our meetings indicate deposit competition remains fierce, but promotional rates may have already baked in several further hikes,” Bank of America Securities analyst Ebrahim Poonawala wrote in a note Tuesday.

Because these rates are variable, investors cannot lock in a higher yield when the Fed raises rates.

**Money‑market funds**

Money‑market funds follow the fed funds rate but don’t adjust instantly, so investors may not capture higher rates as quickly as with T‑bills, Gunster said. Nevertheless, he favors them for client cash. The Crane 100 list of the largest taxable money‑market funds showed a 3.79% annualized seven‑day yield as of Tuesday.

“Money‑market funds are simple. You’ll get the increased rate, and at current levels they’re a solid investment,” he said.

For those in the top tax bracket, Gunster recommends large, high‑quality municipal money‑market funds. The short‑term debt they hold is issued by state and local governments, and the income is exempt from federal income tax.

**CD ladders**

Certificates of deposit let you lock in a rate for a set term, with early withdrawal penalties. Rates are set by banks, just like high‑yield savings accounts.

A smart approach is to build a CD ladder — owning several CDs with staggered maturities, Cheng said.

“I don’t want people tying up all their money for a year,” she said. “You could create a ladder with terms as short as six, seven, or nine months and stagger them.”

**Floating‑rate assets**

For investors seeking a step up in income, floating‑rate funds — which hold bank loans and collateralized loan obligations (CLOs) — can be a good fit, Cheng said. CLOs are pools of floating‑rate business loans whose payouts adjust with short‑term interest rates.

“I’m not saying this replaces cash, but it’s a way to make your cash work a little harder,” Cheng said. “If you don’t need the income, reinvest it. If you do, it’s taxable but pays a bit more because it constantly resets.”