On Sept. 16, the Federal Reserve raised its benchmark interest rate by 25 basis points to a target range of 3.75% to 4% — its first rate hike in more than three years. Chairman Kevin Warsh described the move as essential to restoring the Fed’s credibility on inflation after more than five years of prices running above the 2% target. He is not wrong about the inflation problem. He may be applying the solution at the worst possible moment.
The indicators behind the decision are real. Consumer prices rose 3.4% over the 12 months ending in August — well above target, though down from a peak of 4.2% in May. Core inflation, which strips out food and energy, ran at 2.5%. The Iran conflict that shut the Strait of Hormuz in late February triggered a sharp energy price shock, and tariffs that were announced in 2025 began flowing through retail supply chains with their characteristic multimonth lag, pushing apparel prices up 4.8% and sports equipment up 4.2% at the peak. The Fed held rates steady through most of 2026 as these pressures built. The September hike represents the committee’s judgment that holding further was no longer defensible.
A financial controller does not evaluate a rate decision based on the rationale alone. He evaluates the timing, the environment into which the policy lands, and what the downstream mechanics look like for the businesses and households on the receiving end. On those measures, this hike arrives with significant embedded risk.
Real gross domestic product grew at a 2.1% annual rate in the first quarter of 2026. By the second quarter, that figure had decelerated to 1.5%. Consumer spending continued to contribute to growth, but the rate of contribution is declining. Real average hourly earnings — wages adjusted for inflation — are up just 0.3% over the year, meaning that most Americans have effectively treaded water in purchasing power even as nominal wages rose 3.5%. The job market is functional but moderating: Employers added an average of 80,000 jobs per month this year, well below the pace of prior years, and the unemployment rate stands at 4.1%, with youth unemployment at 9.1%.
Into that environment, the Federal Reserve has now raised the cost of borrowing. The immediate transmission mechanism is direct and unavoidable: variable-rate debt — credit cards, home equity lines of credit, adjustable-rate mortgages — reprices within one to two billing cycles. For the 41% of holiday shoppers who, according to recent survey data, plan to rely on credit cards as one of their primary payment methods this season, and the 26% who expect to put a larger share of purchases on credit than last year, the hike is not an abstraction. It is a line-item increase in the cost of the spending that drives the fourth quarter.
The Fed’s median policymaker projection currently anticipates one additional rate hike before year’s end and two more in 2027. Market pricing reflects expectations for three additional hikes by mid-2027. That trajectory assumes inflation does not cool fast enough, and on current data, that assumption is plausible. The Congressional Budget Office’s projection of the fiscal 2026 deficit has already been revised upward to $2.1 trillion in part because the Supreme Court overturned certain tariff authorities, reducing projected customs revenues by $250 billion. The fiscal picture is not one that provides a meaningful counterweight to tighter monetary policy. Federal interest payments on the national debt crossed $1 trillion on an annualized basis in August, now the second-largest category of federal expenditure behind only Social Security. The government is itself a significant borrower; higher rates compound the fiscal problem while attempting to solve the inflation one.
PROOF TRUMP’S ECONOMY IS BETTER THAN THEY’RE TELLING YOU
The Federal Reserve’s mandate is price stability and maximum employment. Neither mandate has been cleanly met: Inflation is above target, and employment growth is slowing. The September hike is a judgment call made in a genuinely difficult policy environment with no clean options. Warsh described the situation with characteristic precision at his press conference, warning that “too many categories are still posting increases above 3%.”
He is right about the diagnosis. The consequential question — whether the medicine administered in the fourth quarter of 2026 will cure the disease or extend the patient’s discomfort — is one that the economic data will answer over the next two quarters. Controllers do not make predictions. They read the indicators. The indicators, at this moment, point to a harder landing than the headline numbers suggest.
Jose E. Navarro, MBA, is a financial controller and founder of The Navarro Report, a public finance and government accountability publication based in San Diego, California.
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[ H/T Washington Examiner ]
