FEDERAL RESERVE officials have signaled willingness to raise rates if inflation does not improve, but the upcoming Consumer Price Index report Friday will be crucial. Futures markets are pricing in roughly 60 percent odds of a hike at the Sept. 15-16 FOMC meeting.
The problem is structural: the primary inflation drivers—the Iran war, tariffs, and a global chip shortage—respond poorly to monetary policy. Oil surged above $100 a barrel after the February conflict began, directly lifting energy costs. President Donald Trump's tariffs, announced in April 2025 and since challenged in court, have raised import costs. Neither responds to rate hikes the way demand-side inflation does.
Economists surveyed by Bloomberg expect August headline inflation to rise 0.4 percent month-over-month, with core inflation up 0.2 percent. These figures will shape Fed thinking ahead of the Sept. 15-16 decision.
"The key drivers of above-trend inflation are the Iran war, tariffs, and the chip shortage," said Stephanie Roth, chief economist at Wolfe Research. "If the Fed hikes one to two times, that is unlikely to change the backdrop one way or the other."
The central bank's traditional tool—raising borrowing costs to dampen demand—works against demand-side inflation. Supply shocks, by definition, resist that lever. Complicating matters further, massive capital flows into artificial intelligence buildout appear insulated from higher rates, adding another source of price pressure the Fed cannot easily control.
Fixed-income markets are already pricing in the cost of persistently elevated rates. Rising yields have pushed down bond prices, creating duration risk for investors holding existing debt. The yield curve is flattening as traders wait to see whether the Fed will tighten into supply-side headwinds—a policy choice that could prove futile.
