WASHINGTON — About six weeks ago, Federal Reserve Chairman Kevin Warsh announced that a divided central bank was keeping its key interest rate unchanged.

But on Wednesday, the Fed’s rate-setting committee unanimously agreed to a rate hike, and nearly all policymakers signaled that a second increase later this year would likely be appropriate.

So what changed?

In short, the renewed fighting in the Middle East has pushed up gas prices again. And there are signs the economy is still growing at a healthy pace even as inflation stays stubbornly high. All three factors appear to have pushed the committee from wait-and-see mode to determined action.

Yet the Fed’s move doesn’t necessarily mean Americans will pay significantly higher costs for mortgages or other borrowing in the short-term, because financial markets appear reassured by the Fed’s commitment to fighting inflation. On Thursday, the 10-year Treasury yield even slipped a bit, a likely sign of reduced inflation worries among investors.

The Fed’s increase “alleviates concerns around the Fed taking sticky inflation seriously,” Oscar Munoz, head of U.S. economic research at TD Securities, said. “And that they’re ready to act, not just talk about it but actually act.”

The Fed increases the short-term rate it controls to slow borrowing and spending and ideally cool inflation. The Fed’s rate can influence longer-term costs such as mortgage rates, but the Fed doesn’t directly control them.

‘Temporary’ shocks

For months, Fed officials have considered whether higher oil and gas prices from the Iran war would just amount to a temporary hit to inflation. If so, it might not make sense to hike rates: By the time higher borrowing costs started to slow the economy, the gas price shock could be over and inflation would fall back to the Fed’s 2% target on its own.

But with the Iran war now in its seventh month, Fed officials are no longer counting on it being a temporary shock.

At the Fed’s previous meeting July 29, its statement said inflation was elevated “in part reflecting supply shocks that have driven price increases in certain sectors, including energy.”

But its latest statement Wednesday dropped that reference to supply shocks, and instead noted that consumer and business spending “has been resilient.”

And at his news conference Wednesday afternoon, Warsh said, “our judgment about ... the geopolitical situation has changed.”

Gas prices, meanwhile, have continued their steady march higher, reaching $4.44 a gallon Thursday, according to AAA. That’s 38 cents higher than a month ago.

Diesel prices have hit record highs at $6.40, which will push up shipping costs for many types of goods.

The economy can take it

Whenever the Fed increases interest rates, it raises concerns that higher borrowing costs will ultimately weigh down the economy so much that a recession results. Yet Warsh emphasized that the economy is healthy and has continued to grow despite repeated blows from things like higher gas prices, tariffs, and higher interest rates.“Our decision comes at a time when the American economy appears to be strengthening,” Warsh said. “New hiring, private-sector earnings, business capital investment — each of these markers has improved in recent months and is pointing in a good direction.

“Consider the geopolitical landscape of shocks and uncertainty, and you begin to appreciate the resilience of the U.S. economy,” he added.

Bigger paychecks

While the economy may be showing signs of acceleration, stubborn inflation has eroded Americans’ take-home pay. Inflation has now risen faster, on a yearly basis, than average incomes for five months, making it harder for Americans to afford necessities such as gas, food, and rent.

Warsh said the “least well-off” have the “most to gain” from steady growth and stable prices.

If the Fed can get inflation to its 2% goal, when Americans “get their wages, they can put their head above water and deliver real take home pay increases,” Warsh said.

Trump’s attacks

President Donald Trump renewed his criticisms of the Fed Wednesday night and called for much lower interest rates, but did not attack Warsh, whom he appointed as chairman earlier this year. That’s a big change from Warsh’s predecessor, Jerome Powell, who was the subject of repeated personal attacks from Trump, as well as a criminal investigation, which was later dropped.

“The board is very hostile. They’re very political. They’re doing the wrong thing. They’re a bunch of politicians,” Trump said, referring to the 12 Fed officials on the central bank’s rate-setting committee. “They’re raising rates to make Trump do as bad as they can possibly do.”

Speaking to reporters, Trump reiterated his belief that the United States should pay the “lowest interest rate anywhere in the world because we have the strongest credit.”

Yet economists argue Trump’s criticisms are misguided. They note that beyond the Fed, there are multiple reasons why longer-term interest rates have jumped in the past two months. The 10-year Treasury, for instance, strongly influences mortgage rates and this week topped 5% for the first time since 2023. Meanwhile, the weekly average rate on a 30-year fixed-rate home loan climbed to just below 7% — its highest level in over 19 months.

Wall Street investors are demanding higher rates to hold bonds, partly because inflation remains elevated. Investors need higher interest rates to offset the impact of higher prices.

Surging investment in AI data centers has also lifted borrowing costs as large tech firms have issued hundreds of billions of dollars in bonds to finance the buildout. The flood of bonds has also pushed up rates.

Warsh also cited stronger economic growth, which typically raises interest rates as more businesses expect higher returns from new projects so they step up their borrowing to expand.

But Warsh did not mention another driver of rising interest rates that many economists point to: High and accumulating U.S. government debt, which recently topped $40 trillion and has grown sharply under Trump. Nor did he cite tariffs, something his predecessor, Powell, frequently highlighted.

Timing the next move

The consensus view now is that the Fed will raise rates a couple of more times through the early part of 2027 and then maintain them.

Patrick Harker, who served as president of the Federal Reserve Bank of Philadelphia for a decade-long tenure that ended in 2025, said he expected the Fed to reverse cuts that it delivered late last year to guard against a weakening labor market. That would suggest two additional moves, for a total 0.75 percentage-point increase in rates.

Harker said he expects the Fed to skip raising rates at the central bank’s next meeting in late October, just days before the midterm elections, not only because of the “optics” of taking action just before an important election but also because there is “no rush,” having just moved this month.

“I don’t think they’re looking at a long cycle of increasing rates,” Harker said. “I don’t think they were mildly restrictive and this is moving them there.”

The timing of future adjustments also depends in large part on the incoming data. Signs that inflation was continuing to stall out, or worse, deteriorate further, would keep pressure on the Fed to deliver successive increases regardless of the electoral calendar.

The problem, said Seth Carpenter, a former Fed economist who is now at Morgan Stanley, is that “there is very clear tension within the committee in terms of how to think about a single data point.”

Warsh on Wednesday emphasized that he was most focused on trends in inflation rather than specific data points, which he described as “noisy.”

“Data point dependence is a dangerous preoccupation,” he said. “It’s not something that concerns me. Markets over time will come to understand how this Fed makes its decisions, what’s relevant and not.”

But other officials at the Fed, and financial markets more broadly, appeared to be ascribing a great deal of importance to incoming data, suggesting there were different thresholds for additional action for different people.

This report contains information from the New York Times.