Your wallet and your portfolio are both feeling the tension as inflation data from August approaches. The information could prompt the Federal Reserve to raise interest rates next week, affecting households, investors, and businesses. This timing comes as the nation prepares for a difficult midterm election cycle where affordability is a key issue. A July Pew Research Center survey found that economic issues were what registered voters most wanted congressional candidates to discuss, with cost of living and affordability the most frequently cited specific economic concern.
The central bank is now focused on price stability, which has become a major concern after years of high inflation, according to Yahoo Finance. Chairman Kevin Warsh has emphasized that the Fed’s main goal is to control rising prices. In his August 28 remarks at Jackson Hole, Warsh said inflation remained above the Fed's 2% target and that the central bank's predominant focus at the moment should be on prices. He also emphasized that the Fed remains responsible for the other side of its dual mandate, maximum employment.
This focus puts pressure on the central bank to decide whether to increase benchmark interest rates on September 15-16. Raising these rates would make it more expensive to borrow money through credit cards, variable-rate private student loans, and home-equity lines of credit. Most federal student loans have fixed interest rates for the life of the loan, so an increase in the federal funds rate would not directly raise the rate on an existing federal student loan.
Higher interest rates also change how investors value fixed income investments and how equity markets value future earnings.
Rob Conzo, who leads The Wealth Alliance, said the current inflation situation is making it harder for Fed policy to work as intended. He noted that the Fed must assess whether higher energy prices are staying isolated or spreading across the economy. Conzo warned that aggressive tightening could hurt economic growth and job creation. He also cautioned that moving too slowly could allow inflation expectations to become embedded.
Fed officials disagree on the best approach for now but agree that new data showing persistent price pressures may lead to a rate increase next week. The Bureau of Labor Statistics is scheduled to release August Producer Price Index data on September 10. Consumer Price Index numbers are expected on September 11. Both reports are scheduled for release at 8:30 a.m. Eastern Time, just days before the Federal Open Market Committee begins its two-day meeting.
Fed officials have signaled that a 0.25 percentage-point increase is possible. The central bank currently has its federal funds target range at 3.50% to 3.75%. At the Fed's July 29 meeting, officials voted 9-3 to keep rates unchanged, while three dissenters favored raising the target range by 0.25 percentage points.
Expectations for September have shifted as new economic information has arrived. The August employment report showed the economy added 162,000 jobs while the unemployment rate remained at 4.1%, strengthening the case among some analysts for another rate increase. Reuters reported on September 7 that futures markets were indicating roughly a 58% probability of a September hike, while UBS changed its forecast to expect 0.25-percentage-point increases in both September and December.
There is still significant disagreement within the Fed. Governor Christopher Waller has said he could support leaving rates unchanged if the August inflation figures show price pressures continuing to ease. He indicated that stronger-than-expected inflation could instead lead him to support a rate increase.
Inflation caused by supply-side issues cannot be fully controlled through monetary policy, according to Conzo. He added that policymakers may need to accept some inflation volatility while preventing broader economic effects from forming. These second-round impacts could include wage demands and business cost increases. Conzo said the latest employment figures do not indicate that broad wage growth is primarily responsible for the current inflation pressures, making the Fed's policy decision more complicated.