More Fed rate hikes are coming. Politics aside, they are going to honor their mandate. With inflation remaining stubbornly high and the economy showing few signs of weakness, the Fed has little choice but to keep raising interest rates.
Why More Fed Rate Hikes Are Needed
The central bank has a dual mandate that involves inflation and employment. When one becomes a problem, they need to act. If unemployment becomes a problem, they lower the fed funds rate to stimulate the economy. If inflation is the problem, they raise the rate to slow down the economy and push back against rising prices. How are things going now?
Employment isn’t a problem right now in any way, shape or form. In fact, the current unemployment rate is near the lowest level on record. At the same time, the economy is rock solid. The Federal Reserve Bank of Atlanta currently estimates 3.5% GDP growth in the third quarter. If true, that will be the highest level of GDP growth since the pandemic recovery in 2022. It’s also well above the average level of economic growth over the past several decades.
The economy doesn’t need any help from the Fed. Inflation is a quite different story.
Why Inflation Is Still a Problem
Inflation went away as a problem from the early 1980s to the 2020s. The Consumer Price Index (CPI) began lower than 2% in 2020 after having averaged around 2% for decades. But the inflation rate exploded in the following years. The CPI went from under 2% in 2020 to over 9% by the middle of 2022. The rate did move down to around 3% before the recent spike. But the genie is out of the bottle.
These aren’t just a bunch of numbers for economics nerds to crunch. I’m sure you see it yourself. The prices of just about everything have gotten outrageous. By 2025, money was worth more than 20% less than it was just four years earlier. I bought two sandwiches at the deli the other day, nothing else, no chips or drinks. It cost $29. Are you kidding me?
I’ve morphed into my father. Apparently, I have some old-fashioned idea about what things should cost, and I’m still negatively surprised every time a bill comes due. I keep running around making outraged declarations like “twenty bucks?!”, just like Dad used to. It seems I’ve been transported to a world I don’t understand and don’t like. I know I’m weird, but I can’t be alone in this. I’ll bet you’re the same way.
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There are a couple of important things to understand about inflation. One is that the price increases are permanent; they never go back down. Sure, commodity items like food and gas prices do go up and down. But the general level of prices never decreases. That would be deflation. That hasn’t occurred since the Great Depression. Reduced inflation only means that prices increase from current levels at a slower pace.
Sticky Inflation Is Hard to Beat
The other thing to understand about inflation is that it’s a pain in the you-know-what. You can’t get rid of it without a deep recession or worse. This was obvious during the inflation of the 1970s. The Fed would jack up rates and wreck the economy to get inflation under control. It worked. But just for a while. As soon as the Fed took its foot off the gas, inflation came right back, worse than before. Inflation is like one of those annoying birthday candles that you can’t blow out.
Inflation, as measured by CPI, has come way down from the nosebleed levels earlier this decade. In fact, CPI averaged less than 3% from the middle of 2024 until early this year. But inflation has moved higher again since the Iran war, and ensuing higher oil prices, began in March. Since then, the monthly headline inflation rate has averaged 3.6%, well above the Fed’s mandated 2% level.
If you’re old like me, you probably remember the double-digit inflation of the late ‘70s and early ‘80s. Back then, we would have killed for 3.6% inflation. It seems like today we have a bunch of wussies whining about a little 3.6%. But it’s not the same. Inflation is measured differently than it was back then. By the same 1970s standards, the rate is much higher. And it is a problem.
Sure, the recent increase in inflation is largely due to the higher energy prices that have resulted from the conflict with Iran. It’s also likely that the conflict will end in the not-too-distant future and oil prices and inflation will come back down. But it will not come down to the Fed’s mandated level of 2%. No way. Not without a painful economic downturn.
The Fed Will Have to Raise Rates Again in 2026
Inflation is sticky. And it’s here to stay. The Fed will raise the fed funds rate again at least one more time this year, and probably more next year. They’ll have to raise the rate until a crummy economy lowers inflation. That’s the inflation conundrum.
The current high interest rates are not an aberration. It’s the new normal.
Get used to it and adjust accordingly.
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