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Ahead of the Federal Reserve's September monetary policy meeting next week, President Donald Trump and senior administration officials have urged the Fed not to raise interest rates and, alternatively, even to lower its benchmark. For consumers, higher rates would increase borrowing costs at a time when affordability pressures are already mounting. Yet tighter monetary policy can also curb spending and borrowing, helping to cool the economy and ease inflationary pressures. Experts say that may lessen the pinch of everyday expenses, such as groceries and gas, which have been pain points for most U.S. households. The central bank has kept rates on hold all year with inflation remaining well above the Fed's 2% target. But even as Fed Chairman Kevin Warsh curtails so-called forward guidance — or how the Fed signals its upcoming rate moves — investors are expecting an increase in rates at the Sept. 15-16 meeting. Fed funds futures were last pricing in a 60% chance the central bank will hike rates by one-quarter of a percentage point, according to the CME Group's FedWatch tool. The September meeting also comes just weeks before the November midterm elections, as polls show voters remain broadly dissatisfied with high prices and elevated borrowing costs. A potential Fed rate hike, along with inflationary pressures stemming from the ongoing war with Iran and bond market volatility, threatens to further strain household finances. "Persistently high prices have weighed especially heavily on middle- and lower-income households, many of which are struggling to afford basic necessities," said Mark Hamrick, an economic analyst and founder of The Hamrick Brief. The case for higher interest rates Trump has argued that the U.S. should have the lowest interest rates and that maintaining a federal funds rate that is too high puts the U.S. at an economic disadvantage to countries with lower rates. While the president has not directed his attacks specifically at Warsh, as he did former Chair Jerome Powell, in a Sept. 4 post on Truth Social he wrote, "The Fed Board, with its great new leader, must get smart — BE PATRIOTS for a change." However, reducing rates too soon could undermine efforts to tamp down inflation, according to Mark Higgins, senior vice president at Index Fund Advisors and author of "Investing in U.S. Financial History: Understanding the Past to Forecast the Future." "History demonstrates that the most reliable way to restore price stability is to maintain sufficiently restrictive monetary policy until inflation is decisively tamed," Higgins said. "Considering the duration of this inflationary episode, I believe sending a clear message via an interest rate hike is appropriate and in the best interest of the American people." How the Fed's next move may affect you When the Fed raises rates, borrowing becomes more expensive. Consumers face higher costs for car loans, credit card debt and mortgages, among other financial products. Generally, shorter-term rates on consumer debt are closely pegged to the prime rate, which is typically 3 percentage points above the fed funds rate. Longer-term rates are more dependent on inflation expectations and other economic factors. For example, 15- and 30-year fixed mortgages typically track Treasury rates and have moved sharply higher alongside rising bond yields. As climbing oil prices fuel inflation concerns, the 10-year U.S. Treasury yield briefly topped 4.8% on Tuesday, pushing the average rate on a 30-year fixed mortgage to 6.89%, according to Mortgage News Daily. "The president's exhortation to the Fed to cut rates would prove counterproductive, almost surely causing already-rising long-term rates to rise substantially further," said Mark Zandi, chief economist at Moody's. Fixed mortgage rates, which have risen from less than 6% before the war with Iran, could surge to well above 7%, he said. "Borrowing costs for businesses and commercial property owners would rise, and even the stock market would likely come under pressure." Bond investors expecting a Fed rate hike to fight above-target inflation would be spooked by a Fed cut, Zandi said: "It would signal that the Fed has lost its independence from the president, which would mean even higher inflation in the future." In the end, preserving the Federal Reserve's credibility is what matters most, according to Hamrick. If consumers lose faith in the Fed's ability to restore price stability, they may come to believe that higher inflation is inevitable, he said. "Those expectations could become self-reinforcing, influencing wage and price decisions and making inflation more difficult to control." The administration's pressure underscores why Federal Reserve autonomy is important, Hamrick said. "Preserving the institution's independence ultimately strengthens its ability to serve the American public."
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