A new Chairman at the helm of the US Federal Reserve was supposed to push forward President Donald Trump’s agenda to lower interest rates in the world’s largest economy. However, economic realities and responsibilities are not so easily ignored.On Wednesday, the US central bank’s rate-setting panel, the Federal Open Market Committee (FOMC), increased the federal funds rate target range by 25 basis points (bps) to 3.75-4%. This was the Fed’s first rate-hike in three years.Strikingly, all 12 FOMC members voted to increase the key interest rate, including new Fed Chair Kevin Warsh, who was appointed by Trump after the end of Jerome Powell’s term earlier this year.The White House was not particularly happy with the decision. A spokesman called it “rather unfortunate” and not backed by a “particularly compelling economic case” from the point of view of the Trump administration. The Fed, though, thinks US economic activity is expanding at a “solid” pace.“While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient. Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little,” the FOMC said in its statement. It added that “inflation remains elevated” and its decision to increase rates will support a “timelier return” to the 2% inflation target.“The Committee will deliver price stability,” it concluded, sounding a lot like the Reserve Bank of India.Story continues below this adThe Fed wasn’t the only central bank to raise interest rates on Wednesday: central banks in UAE and Bahrain both raised their main interest rates by 25 bps to 3.9% and 4.5%, respectively, mirroring the decision in the US.And while the Bank of England is expected to leave its policy rate unchanged at 3.75% when it announces its decision later today on Thursday, the Bank of Japan on Friday is widely seen raising interest rates to 1.25% – the highest in 31 years.“The risks to Japanese inflation are skewed to the topside,” ANZ economists said in a note last week. “There is no resolution in sight to the conflict in the Middle East or indication of when traffic through the Strait of Hormuz will normalise. The JPY (yen) remains weak, which is contributing to higher import price pressures; and strong AI demand could add to goods and services prices,” they further said, adding that with wage growth high and growth above the its potential, there is a greater risk than before of elevated oil and import prices being passed on to domestic inflation.Also in Explained | Rs 15,000 crore revenue: Why government is backing UPI levy despite backlashLest it be forgotten, the European Central Bank last week raised interest rates by 25 bps, noting that the upward price pressures caused by the West Asia conflict are set to keep inflation “well above target for an extended period”.India’s inflation headacheStory continues below this adThe RBI’s Monetary Policy Committee (MPC) is scheduled to meet October 5-7 and it is increasingly expected to announce a 25-bps rate hike of its own. This would be the first rate hike by the RBI in three-and-a-half years and take the repo rate to 5.5%.Like the rest of the world, India has its own inflation troubles. In August, all measures of inflation – for households, wholesalers, and producers – increased. The RBI’s main indicator of price levels, the Consumer Price Index CPI), rose 4.82% in August, marking the third straight month it had come in above target.The RBI is mandated to target CPI inflation of 4% within a tolerance band of 2-6%. While CPI inflation is within this range, some economists see it jumping to 5.7% in September.The RBI expects CPI inflation to average 4.7% in July-September, 5.9% in October-December, 5.5% in January-March 2027, and 5.3% in April-June 2027.Story continues below this adAccording to Soumya Kanti Ghosh, State Bank of India’s Group Chief Economic Adviser, the process of generalisation of price pressures has started – something the MPC said in August there were “little signs of”.Also Read | The worry for RBI in August inflation data: Jump in sugar and chip prices“Going forward, we believe CPI inflation may cross 6.5% mark before dropping to less than 6% in early 2027. (It is) Time to build moats through a 25-bps hike in October and December MPC (meetings) each, and then to pause and take stock with upcoming data,” Ghosh said.Rate hikes not overEven the Fed is expected to follow up its rate hike on Wednesday with another one before 2026 ends.Every alternate FOMC meeting sees its members release forecasts for several key economic indicators, including the interest rate. And the latest predictions show another 25-bps rate hike is seen this year, before the FOMC stands pat in 2027.Story continues below this adMarkets, however, are expecting more, with yields on US government bonds maturing in 10 years crossing 5% this week. Apart from briefly flirting with this level in 2023, this is the highest yield on the 10-year bond in almost 20 years. Why? Higher prices, expectations of interest rate hikes, and mounting US debt (which crossed $40 trillion last month).“Ultimately, the Fed had little choice but to raise key interest rates today,” said Bernd Weidensteiner, Senior Economist at Commerzbank. “Had Warsh disappointed expectations in this situation and failed to raise rates, there would have been a risk of a severe negative reaction in the bond market. After all, doubts would then have solidified as to whether the Fed would actually do what is necessary to bring inflation back down to the 2% target.”Back home, pressure to hike rates is increasing on the RBI too.