KEY POINTS
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The Federal Reserve raised its benchmark interest rate by 0.25 percentage points to a target range of 3.75% to 4%.
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Policymakers signaled another rate increase later this year as inflation remains above the Fed’s 2% goal.
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Higher borrowing costs could pressure construction financing, project feasibility and contractor operating margins.
The quarter-point increase marks the central bank’s first rate hike since 2023 and could add pressure to borrowing costs across the construction and real estate markets.
The Federal Reserve raised its benchmark interest rate, the Federal Funds Rate (FFR) Wednesday for the first time since 2023, increasing the target range for the federal funds rate by a quarter of a percentage point to 3.75% to 4%.
The Federal Open Market Committee approved the move by a 12–0 vote, saying the action would support the Fed’s dual mandate and promote a timelier return of inflation to its 2% goal. The Committee also reaffirmed its policy of maintaining ample reserves in the banking system.
In its September 16, statement, the Fed said economic activity is expanding at a solid pace, with resilient domestic spending, strong productivity growth and robust capital investment.
Job gains have kept pace with the workforce, and the unemployment rate has changed little. However, inflation remains elevated, while uncertainty persists in part because of geopolitical developments.
The rate increase lifts the FFR to about 3.9%. Over time, the move could contribute to higher borrowing costs for mortgages, auto loans and credit cards, depending on how financial markets and lenders respond.
The impact in the construction industry will be quickly noticed in the revolving lines of credit tied to LIBOR or SOFR, both of which move with the FFR. In an industry where contractors must pay for wages and materials weeks and months in advance of being repaid, higher rates will erode operating margins.
Fed Signals Another Increase Later This Year
The central bank’s quarterly projections also signaled that policymakers expect to raise rates a second time later this year, bringing the rate to approximately 4.1%.
That outlook suggests that the Fed knows that inflation won't be brought to within its 2% target by today's actions alone. In fact, recent decades of history shows that the Fed's success in battling inflation has only come issuing a series of sequential rate hikes as was seen in 2017 and 2022.
Construction Industry Faces Continued Financing Pressure
Higher interest rates can impact project feasibility, financing costs and investment decisions. Mortgage-rate pressure may weigh on housing demand, while higher borrowing costs can make it more expensive to finance land acquisition, equipment purchases, and construction loans.
Commercial projects may also face additional scrutiny as owners and lenders reassess expected returns, capitalization rates and debt-service obligations. Contractors could see downstream effectsif developers delay starts, reduce project scope or take longer to secure financing.
At the same time, the Fed’s assessment of robust capital investment and solid economic activity points to continued demand in portions of the construction market. Businesses may increasingly prioritize projects with strong fundamentals, reliable financing and clear near-term returns as policymakers work to bring inflation under control.
The Federal Reserve said it will continue working to deliver price stability while monitoring economic and financial developments. Its next regularly scheduled Federal Open Market Committee meeting is October 27 and 28, 2026.
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