Federal Reserve hikes rate to 3.9 per cent as inflation stays high and economy grows The Federal Reserve raised its benchmark rate to 3.9 per cent on Sept. 16, 2026, as the U.S. economy grows steadily, inflation remains stubbornly high, and borrowing costs stay elevated despite attacks from President Donald Trump. The Federal Reserve raised its benchmark interest rate to 3.9 per cent on Wednesday, Sept. 16, 2026, a move that reflects a new era of stubborn inflation and solid economic growth. Fed Chair Kevin Warsh announced the increase at a news conference in Washington. President Donald Trump quickly renewed his attacks on the central bank after the hike. On Truth Social, he said U.S. rates should be one per cent instead. But economists say the Fed matters less than broader economic trends when it comes to longer-term borrowing costs.The economy is growing steadily despite repeated shocks, and may even be accelerating. Inflation remains stubbornly high. Big tech firms are borrowing huge amounts of cash to spend on data centre construction, while the federal government keeps running large yearly budget deficits. All these trends point to higher interest rates regardless of what the Fed does, analysts say.The low-rate, low-inflation world that lasted nearly 15 years after the Great Recession is over. A higher-priced, higher-rate world is taking its place. Mortgage rates fell into the three per cent range in the 2010s and went even lower during COVID-19, but those deals are long gone. The average 30-year mortgage rate reached 6.95 per cent last week, the highest in more than a year and a half.Joe Brusuelas, chief economist at RSM, a tax consulting firm, said a big reason for the change is a shift from the pre-pandemic economy, when consumer and business demand was weak. Now healthy spending is colliding with supply shocks and bottlenecks. Higher oil and gas prices because of the Iran war have added to the pressure. The AI buildout has struggled with an insufficient supply of computer chips, electronic equipment, and workers.Brusuelas said the economy has undergone a structural transformation."We've undergone a structural transformation of the economy," Brusuelas said. "The regime change in inflation and interest rates is the outcome. " The shift returns the economy in many ways to where it was before the financial crisis that ran from December 2007 through June 2009. Even after that downturn ended, consumer and business spending stayed weak.Millions of Americans in the 2010s focused on paying down outsized mortgages and credit card debt. Businesses saw few investment opportunities, and big tech firms such as Google and Meta piled up cash. Now those companies are using those stockpiles to build out AI data centres, and are borrowing even more money to do so. American consumers, despite surveys finding they are pessimistic about the economy, are still spending at a healthy pace.A recent report showing retail sales picked up last month led economists at Bank of America to forecast growth will reach a healthy three per cent at an annual rate in the July-September quarter. That would extend the economy's steady expansion. Warsh highlighted the shift in a speech at the central bank's annual conference in Jackson Hole, Wyoming last month.After 2008, he said, it was widely believed that excess capital would sit on the sidelines for a long time because there were not enough compelling investment opportunities."All the good stuff had been invented. So growth would be low and slow," Warsh said."Well, times sure have changed. Ever-expanding pools of capital are pouring into AI-related infrastructure of all sorts." The Fed chair's comments underscored how much the economy has changed. The additional spending and investment has contributed to higher longer-term interest rates on government bonds that are competing for lenders. The yield on the 10-year Treasury bond topped five per cent this year for the first time since 2023, even before the Fed raised its benchmark rate Wednesday.At the same time, political polling and consumer sentiment surveys continue to find that many Americans are struggling to keep up with rising prices. Affordability remains a top concern heading into the midterm elections. Even as the economy expands, inflation has outpaced annual growth in average wages for the past five months. Brusuelas said the U.S. expansion is imbalanced, with growth entirely dependent on the AI buildout and strong spending by wealthier consumers.Those consumers have benefited from rising stock prices driven by hopes that AI will lift profits. Yet many of Trump's own policies have contributed to higher borrowing costs, in particular the Iran war that has driven up gas prices. When inflation persists, investors demand higher interest rates on longer-term Treasury bonds such as the 10-year, which strongly influences mortgage rates."The president can say he wants interest rates lower all he wants, and yet he continues to push the button on all the policies that raise rates," said Elizabeth Pancotti, vice president of policy, advocacy and research at the progressive Groundwork Collaborative. The rate increase to 3.9 per cent came despite Trump's repeated demands for lower rates. The Fed's decision reflects the reality that inflation remains above target while growth continues, leaving policymakers with little room to cut.Economists say the days of ultra-low rates are unlikely to return soon. The combination of AI-driven investment, large federal deficits, and persistent inflation has created a new normal that keeps borrowing costs elevated for mortgages, credit cards, and business loans.