The Fed is Ready to Raise Interest Rates, Risk of Economic Slowdown Looms

The Federal Reserve faces a difficult choice ahead of its September 15–16, 2026, policy meeting. Rising inflationary pressures are making an interest rate hike increasingly necessary, but such a policy could potentially slow US consumption, investment, and economic growth.

Expectations for an interest rate hike strengthened after the US consumer price index rose 0.4% in August, while core inflation increased 0.3%. Price pressures at the producer level also remained strong, with the PPI rising 0.4% month-on-month in August and 5.4% year-on-year. This situation reinforces the view that the Fed's struggle to bring inflation back to its 2% target is not over.

A Reuters survey of 101 economists showed that approximately 85% of respondents expect the Fed to raise interest rates by 25 basis points to a range of 3.75%–4.00% at this week's meeting. In fact, 53% of economists expect at least one additional rate hike by March 2027.

However, interest rate hikes have consequences for the economy. The cost of mortgages, vehicles, credit cards, and corporate financing will increase. This could dampen public consumption and cause companies to delay investment and expansion, risking a loss of momentum in economic activity.

Signs of a slowdown are already emerging in several sectors. US retail sales fell in July for the first time in nine months, while the Fed's latest Beige Book shows economic activity expanding only moderately and job growth relatively limited.

The situation is further complicated by the fact that inflationary pressures stem partly from surging energy prices. Rising oil prices can increase transportation and production costs, but higher interest rates cannot directly increase energy supply. If inflation remains high while growth weakens, concerns about the risk of stagflation could increase.

Therefore, market attention is not only focused on whether the Fed will raise interest rates, but also on how aggressive its next policy will be. A 25 basis point hike could help maintain the Fed's credibility in combating inflation, but tightening too far risks the inflation "medicine" actually harming the US economy. (CP)