FED: Your Rates May Rise Again This Year

If you are carrying a mortgage, a car loan, or a credit card balance, the Federal Reserve just told you something. On Wednesday, Oct. 7, the central bank released the minutes of its September meeting. According to coverage of the minutes, most participants judged that it would likely be appropriate to raise the target range for the federal funds rate once more by the end of the year.

That is not a promise. It is a statement of where most officials stood at that meeting, and the minutes are a record of discussion, not a vote on future policy. But it is the clearest public signal yet that the Fed's inflation fight is not finished.

What the minutes say

At the September meeting, as reported, the Fed raised its target range by a quarter percentage point to 3.75% to 4.00%, effective Sept. 17. Reports differ on how to describe the vote tally, so we will not quote one here. What is consistent across the coverage is the direction: officials agreed that inflation remained elevated and had made little progress toward the Fed's 2% target in recent months.

One outlet cited Fed staff estimates putting inflation, as measured by the personal consumption expenditures index, near 3.8%, with the core measure, which excludes food and energy, near 3.4%. These are staff estimates made before the latest data, and both are well above the 2% goal.

Timing is the open question

Notably, the minutes did not signal that the next increase would come at the Oct. 27-28 meeting. Markets, as reported, were pricing a chance of roughly 20% to 25% for a hike at that meeting. The next meeting after that is Dec. 8-9, which leaves December as the natural candidate if the data stays hot. That is analysis, not something the Fed has said.

The data since the meeting has also complicated the picture. Coverage notes cooler-than-expected inflation data and that September job growth, at just 29,000, was far weaker than economists predicted. Markets responded by trimming the odds of an October move. A hawkish set of minutes meets softer data, and the Fed has to decide which one to believe.

The take

For years Washington treated inflation as someone else's problem, and families paid for it at the grocery store and the gas pump. Inflation near 3.8% on the Fed staff's estimate of its preferred measure is not a rounding error. It is a tax on every paycheck, and it hits savers and fixed-income retirees hardest. The central bank has to be willing to do the unpopular thing when prices demand it, and conservatives who care about sound money should say so plainly, even when higher rates are painful for borrowers.

But the Fed's task is made harder by the policy around it. Rate hikes are a blunt tool. They work by cooling demand, and cooling demand means fewer jobs and slower growth. If a weakening labor market and stubborn prices arrive together, as the last few weeks suggest they might, the central bank is left choosing between two bad options. The best remedy is not monetary at all: it is a federal government that stops adding fuel to the fire with deficits that Congress, of both parties, keeps refusing to control.

Americans should also keep the limits of this reporting in mind. The minutes describe a meeting held weeks ago. The Fed will see the next inflation report, due Wednesday, Oct. 14, before it meets again, and economists' forecasts for that report are only forecasts. If prices cool, the case for another hike weakens. If they do not, the minutes will look like a warning that was ignored.

What should you do with this? Nothing dramatic. But if you are weighing a large purchase that depends on a variable rate, or sitting on credit card debt, assume that borrowing costs are not heading down any time soon. Pay down what you can. The central bank is telling you, in its own careful language, that the era of easy money is not coming back this year, and it may be about to get a little more expensive.