Consumer surveys are also sending worrying signals. According to the University of Michigan, consumers’ one-year inflation expectations rose to 4.6% in September from 4.0% a month earlier. Moreover, for the first time since 2023, a majority of respondents expect interest rates to rise over the next year.
Rising inflation expectations are particularly important for the Fed. If households and businesses begin to assume that high inflation will persist for longer, those expectations could influence decisions on wages, prices and spending. That, in turn, would make returning inflation to the Fed’s target even more difficult.
Markets are pricing in further rate hikes
A growing number of economists believe that a potential September move may not be the final rate hike of the year. Markets have also started pricing in the possibility of another increase before year-end. The main argument is the strength of the economy, which could expand this quarter at a pace well above its long-term trend.
Such strong growth combined with low unemployment increases the risk that demand will remain too robust for inflation to return quickly to 2%. If oil prices also remain high, the Fed could find itself forced to tighten monetary policy more aggressively.
The conflict in Iran remains another significant source of uncertainty. Its impact on the oil market could add to inflationary pressures in the U.S. economy. If higher energy costs prove persistent and begin feeding through to other categories of prices, the case for further rate hikes will become even stronger.
The Fed’s decision could intensify its conflict with Donald Trump
Tighter monetary policy would have political as well as economic consequences. Donald Trump has been calling for lower interest rates, meaning that a rate hike would likely further increase tensions between the White House and the Federal Reserve.
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