A Federal Reserve Interest Rate Hike is Almost Guaranteed: Why That's a Good Thing

The latest inflation data means it's very likely that the Federal Reserve will raise interest rates this week for the first time in more than three years. After the August Consumer Price Index (CPI) was released last Friday, investor expectations for a rate hike at the Fed's September meeting jumped from about two-in-three to nearly 90%, according to the CME FedWatch tool. There's also a good chance that another rate hike or two could follow in Q4.

The main reason is that inflation continues to exceed the Fed's 2% target. At last check, the CPI increased 3.4% year-over-year (2.4% if you exclude food and energy). An alternate gauge, the Personal Consumption Expenditures Price Index (which is actually the Fed's preferred measure), is a bit higher at 3.7% (3.3% excluding food and energy).

Why a rate hike is necessary

At first blush, a rate hike doesn't sound great for consumers. Borrowing is already expensive enough. For example, the average credit card rate is 20.94%, according to the Fed. That's close to a record high. If you carry a balance month to month, especially if you can only make minimum payments, that number quietly decides how fast your debt grows. The Fed raised rates by five-and-a-quarter percentage points in 2022 and 2023 (higher rates are meant to combat inflation by making borrowing more expensive and slowing the economy). Then it took away some of the medicine in 2024 and 2025 as inflation cooled, lowering rates by a point and a half.

But higher rates are once again needed to fight inflation, which has made a comeback in 2026. In fact, inflation hasn't been below the Fed's 2% target since early 2021. For reasons spanning the COVID-19 pandemic, supply chain disruptions, tariffs and the war in Iran, everything we buy costs about 30% more than it did in 2019 (on average).

That includes a 33% cumulative rise in food prices, according to the Bureau of Labor Statistics – the sharpest increase in a half-century. In other words, a cart of groceries that would have cost $100 in 2019 is now $133.

Viewed through this lens, a rate hike could actually be seen as a good thing for consumers in the sense that a rate hike should help bring inflation down. And inflation is eating everyone's paycheck. It's the biggest reason why we at Money Management International – one of America's largest and oldest nonprofit credit counseling agencies – are seeing a 10-year high in debt management plan enrollment and five straight years of growing financial counseling demand. The people calling us aren't reckless, their same paycheck just stopped covering the same life expenses, and most are surprised how quickly a counselor can help you create a plan to balance your budget and get out of debt.

Inflation has become intolerable for most Americans

A rate hike also sends a message to investors, businesses, and consumers that the Fed is serious about fighting inflation. New Fed Chairman Kevin Warsh has been proclaiming that since he took office in May. It's time to put some action behind the rhetoric, because we can't continue down this path.

Yes, oil and gas prices are in a league of their own: fuel oil costs 52% more than a year ago, according to the CPI. Gasoline is up 27% and related categories such as airline fares are up 23%. And a quarter-point Fed hike isn't going to solve a geopolitical supply crisis. But it's not just energy costs that are draining consumers' wallets and pushing them deeper into debt.

Clothing costs 3.6% more than a year ago, food away from home costs 3.4% more, and shelter costs 3% more. Increases like these compound over time. A 3% annual inflation rate doesn't sound huge, but it means prices are doubling every 24 years.

Over a 10-year span, the cumulative impact is 34%. And a lot of damage has already been done the past several years. Credit card balances are rising even faster. For consumer sentiment to improve and debt to decrease (or at least level off), we need to get back to a place where wage growth is consistently outpacing inflation.

Higher rates aren't the best tasting medicine, but the economy needs them.

The Fed's timeline isn't yours, though. Debt is always easier to deal with when rates and balances are smaller and more manageable. 

Regardless of what happens at the Federal Reserve, if you're struggling with debt payments, help is available. MMI offers free financial counseling online and over the phone, 24/7. Our certified counselors can help you create a customized debt solution that saves you money and gets you out of debt 7x faster than paying on your own.