Should the Federal Reserve raise interest rates again to bring down inflation?
📖AI Policy Brief & Stances
The State of Affairs (AI Brief)
On September 16, the Federal Reserve raised its benchmark interest rate by a quarter point, to a range of 3.75% to 4.00%. It was the Fed's first increase since 2023, and the vote was unanimous, 12–0. The Fed said inflation "remains elevated" and that the move would support "a timelier return" to its 2% goal. Most Fed officials expect one more quarter-point increase by the end of 2026; none project a cut. Inflation has picked up this year, driven mostly by energy. Consumer prices rose 3.4% in the 12 months to August, with gasoline up 27.4% as constraints on Middle East oil exports kept crude near $90 a barrel. Excluding food and energy, the two main measures disagree: core CPI rose 2.4%, while the Fed's preferred gauge, core PCE, rose 3.3% in the year to July. The job market is steady: unemployment is 4.1%, and employers added 162,000 jobs in August. Borrowing costs have climbed. The average 30-year mortgage rate reached 7.03% in late September, up from 6.30% a year earlier, and the 10-year Treasury yield rose from 4.79% to 5.17% during September. The President has publicly pressed the Fed to lower rates; asked about that pressure, Chair Kevin Warsh said, "Independence is a two-way street." The question is whether the Fed should keep raising rates, hold them where they are, or start cutting.
- Inflation has run above the Fed's 2% goal for more than five years. Cleveland Fed President Beth Hammack said she is "not confident it will return to our objective on its own." [11]
- Current rates may not be slowing the economy much. Dallas Fed President Lorie Logan said "monetary policy is not restraining the economy," and Chair Warsh noted credit spreads are "near the low ends of their historical ranges." [13] [14]
- Price increases are broad, not just gasoline: Chair Warsh said 54% of the items in the PCE price index are rising faster than 3%. [14]
- Repeated supply shocks can feed lasting inflation. Minneapolis Fed President Neel Kashkari argued monetary policy "does have an important role to play in addressing a series of successive supply shocks," pointing to the 1970s. [12]
- Most Fed officials see inflation as the bigger risk. Governor Lisa Cook said inflation risks are "higher than the risks to the employment side," and 16 of 18 officials project rates ending 2026 higher than today. [15] [2]
- Underlying inflation is already cooling. Governor Christopher Waller noted three-month inflation "has fallen steadily from 4.76 percent in February" and said he does not see energy prices and tariffs as "a significant source of ongoing inflation pressure." [16]
- The biggest driver is an oil shock that interest rates can't fix. Gasoline is up 27.4% in a year; Chair Warsh said the Fed "cannot affect" individual prices such as oil, and the EIA expects crude to fall from about $90 to $74 a barrel in 2027. [4] [3] [10]
- Tariff effects appear to have peaked. St. Louis Fed research finds they "appear to have leveled off," and Dallas Fed researchers estimated core inflation excluding tariffs at about 2.3% in March. [19] [18]
- Borrowing is already getting more expensive without another hike: the 30-year mortgage rate passed 7%, and the 10-year Treasury yield rose from 4.79% to 5.17% in September. [8] [9]
- Growth is uneven. The economy grew at a 1.5% annual rate in the spring, and some Fed officials noted "lingering signs of softness in the labor market." [7] [17]
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