4 Reasons the Fed Rate Hike Might Have Been a Mistake

The Federal Open Market Committee recently met for its September meeting, the first meeting after the summer break. Markets expected a 92% chance that the Fed was going to hike interest rates.

The Fed delivered on those expectations, raising the federal funds rate 25 basis points to 3.75-4.00%. But was the Fed’s decision the right one?

Here are four reasons the Fed might have wanted to wait before hiking rates.

1. Political Pressure on the Fed

The biggest argument against a Fed rate hike was that President Trump didn’t want one. Trump railed against Chairman Powell for hiking rates and not lowering, and he nominated Warsh as Chairman because he thought Warsh would be someone who would implement his wishes.

For a newly-installed Fed Chairman to buck such massive political pressure immediately and do what his boss doesn’t want is just about unthinkable. Could this decision come back to bite Warsh in the future?

2. Inflation Isn’t That High

In the grand scheme of things, inflation today just isn’t that high. The most recent consumer price index (CPI) inflation rate was 3.4% year on year, and 2.4% year on year when food and energy prices were stripped out.

Yes, that’s higher than the Fed and American consumers would like to see. But compared to what we saw back in 2022, with the highest inflation rates in over 40 years, it’s not that high.

The last time the Fed started a rate hike cycle, back on May 5, 2022, the latest CPI report had shown that inflation was increasing at a rate of 8.5% year on year. And the three previous monthly releases had inflation rising at 7.9%, 7.5%, and 7.0%.

That was about as slam dunk a case for hiking rates as we’ve ever seen, yet it took months of the Fed dragging its feet for hikes to come, and even then it was only a 50 basis point hike while inflation was running at nearly 4x the Fed’s 2% inflation target.

Today we’re seeing CPI at 3.4% year on year, and the personal consumption expenditures (PCE) index that the Fed supposedly prefers, is at 3.7% year on year, lower than it was in April and May. That’s not exactly a strong case that inflation is rising out of control.

3. The Fed Doesn’t Have All the Information

This was the first FOMC meeting after the summer break. And because of the timing, coming mid-month, the Fed is working with incomplete inflation data.

The next PCE release will come on September 30, 2026, with another following on October 29th. The next CPI release will come on October 14th.

The next FOMC meeting is scheduled for October 27-28, and it’s probably safe to assume that Fed policymakers might get an advance notice of the October 29 PCE numbers before that meeting.

That means that if the Fed had waited until October to make a rate decision, they would have had at least three inflation readings (August & September CPI, August PCE) and possibly a fourth, rather than just the single August CPI reading they were working with this time around.

We’ve seen the Fed make mistakes before, like ignoring months of rising inflation in early 2022 before making a belated rate hike. Was this rate hike premature, and could it be another mistake that the Fed will rue?

4. Inflation Isn’t the Biggest Headwind

Inflation, per se, is arguably not the biggest headwind facing the economy today. Yes, consumers and businesses are being squeezed by rising prices, and particularly gas and diesel prices, but price increases on oil and gas aren’t being caused by inflation.

The high gas prices facing our economy (and the rest of the world) are the result of the fighting in the Middle East right now. Between the closure of the Strait of Hormuz and the more recent Houthi attacks on Saudi Arabia’s oil pipeline and seizure of Yemen’s Red Sea coast, events in the Middle East are very likely going to continue to impact gas prices for the foreseeable future.

Events in Russia and Ukraine are going to impact prices too, as Ukraine continues to strike at Russia’s energy industry, something which President Trump has tried to forestall due to the negative impact on world diesel prices.

Unrest about rising gas prices has helped foment discontent in Syria, which is now facing major protests. While it’s hard to imagine protests occurring here in the US, how much more pain can US drivers and US shippers absorb in the form of higher gas and diesel prices?

These high prices could have a negative impact on economic growth, and hiking interest rates, which normally are expected to cool economic growth further, could only add fuel to that fire.

How the Fed’s Rate Decision Could Impact Gold Prices

The dominant narrative around interest rates is that interest rate hikes are bad for gold, as higher interest rates means that interest-bearing assets give higher yields and thus are more attractive vis-a-vis gold, which pays no interest.

Some commentators stated that gold prices had already baked in the expectation of a Fed rate hike, and indeed the gold price had sustained several days of sustained dips. But there’s one thing in discussing interest rates that has to be kept in mind.

Bond yields on longer-dated sovereign bonds have been rising around the world, so much so that the US Treasury doubled the size of its bond buybacks, and the UK is now set to stop issuing 20- and 30-year gilts. These rising bond yields are not solely the result of rising inflation expectations, but are an indicator that markets increasingly realize the tenuous fiscal position of world governments.

In other words, loaning money to governments is becoming riskier, and if markets are going to fund government debt, they’re going to demand higher interest rates to make that happen. That’s an environment in which gold could prosper, as gold tends to thrive as a safe haven asset during periods of financial, political, and economic uncertainty.

If the Fed’s rate hikes end up slowing the economy, or if inflation rises further and spurs further rate hikes, that could be further bullish news for gold. So now may be the time to assess whether gold should play a part in your financial planning.

Gold prices have moved between about $4,000 and $4,400 an ounce since June, not really breaking one way or the other. Could the Fed’s interest rate decisions be the impetus they need to break higher?

If you think the outlook for the economy looks weak, that growing government spending, higher debt, and rising bond yields bode ill for the future, or that conflict in the Middle East could spiral out of control, maybe now is the time to start thinking about buying gold.