The Fed is fighting the wrong inflation war — and you’re collateral damage

Working families and small businesses are already paying the price of higher interest rates. Mortgage payments are harder to afford. Car financing is more expensive. Business owners are paying more to borrow, invest, and hire. The Federal Reserve has a difficult job and price stability matters, but before it raises rates again, the threshold for action should be clear and the evidence compelling.That is the accountability test facing the Fed now. Inflation remains above its 2% target, but the latest numbers tell a more complicated story. Consumer prices rose 3.4% over the past year while core inflation eased to 2.4%. Energy prices rose 16.3%, gasoline increased 27.4%, and fuel oil was up 52%. Gasoline alone accounted for more than one-third of August’s monthly increase in consumer prices.Those numbers matter because higher interest rates are designed to restrain demand. When families and businesses are spending faster than the economy can produce, making money more expensive can cool demand and ease price pressure. But higher rates cannot produce another barrel of oil, reduce geopolitical risk, or lower the cost of moving goods across the country. Main Street is already feeling the consequences. Existing home sales fell to a 14-month low in August, and the average 30-year mortgage rate climbed to 6.95% in September. Families trying to buy a home do not experience monetary policy as a debate about basis points. They experience it as a monthly payment they can or cannot afford.The same is true for automobiles. The average new vehicle sold for more than $50,000 in August, while the estimated average auto loan rate was 9.49%. Add sharply higher gasoline prices, and working families are squeezed from both directions: it costs more to finance the vehicle and more to operate it.Small businesses face the same calculation every day. They make up 99.9% of American businesses and employ more than 62 million people. When borrowing costs rise, an owner deciding whether to buy equipment, expand a facility, or hire another worker has to run the numbers again. Those decisions matter far beyond one business. They determine whether communities grow and whether new jobs get created.And that points to what is missing from the current debate. The Fed itself says productivity growth is strong, capital investment is robust, and economic activity is expanding at a solid pace. We should want more of that, not less. Greater productivity, more investment, and more supply allow the economy to grow without generating the same pressure on prices. They are not separate from the inflation solution. They are part of it.That makes the Fed’s recent history especially important. In September 2024, it cut rates by 50 basis points because it believed inflation was moving sustainably toward 2% and the risks to inflation and employment were roughly in balance. Today, it has raised rates again while warning that inflation remains elevated.Conditions change, and policy should change with them. But accountability requires explaining what changed. What threshold has now been crossed? What evidence shows that excessive demand, rather than energy and supply pressures, requires another increase? And what prices does the Fed believe higher rates will actually bring down?Those questions are not academic. Behind every rate decision is a family wondering whether homeownership is still within reach, a parent deciding whether a reliable car fits the monthly budget, and a small-business owner deciding whether there is enough room to hire one more person. Those decisions are the economy.They are also part of something larger. The American dream has to remain real. People who work, save, build, and take reasonable risks should still have a chance to own a home, build financial security, start a business, and create something of their own. Monetary policy should not make those possibilities harder to reach unless the economic case for doing so is clear.The Fed should fight inflation. But it should fight the inflation we actually have. If excess demand is driving prices higher, then higher rates have a role. If energy and supply pressures are doing much of the work, making homes, cars, and business investment more expensive will not solve the underlying problem.RATE HIKES CAN’T STOP DRONE STRIKES: WHY IS THE FED PUNISHING AMERICANS FOR THE HORMUZ BLOCKADE?The Fed has the independence to make difficult decisions. With that independence comes accountability for the evidence, the threshold, and the consequences. That standard matters most when the cost of getting the decision wrong falls on people who are already being squeezed.Before asking them to carry more, the Fed should answer one question clearly: What part of today’s inflation will another rate hike actually fix?Dan Varroney is an economic strategist, founder and CEO of Potomac Core, and author of Rethinking Economic Growth.