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The Federal Reserve, as part of its responsibility to safeguard the stability of the country’s financial system, targets an inflation rate of 2%. Its most visible tool for that purpose is to increase the federal funds interest rate when inflation is rising and to reduce it when inflation falls below the target.
Many observers expected that rate was likely to be lowered when Kevin Warsh replaced Jerome Powell as chair of the Federal Reserve Board. President Trump’s nomination of Warsh came after strong demands from the president for aggressive rate cuts.
The Current Inflation Outlook
With recent price and inflation numbers, however, it appears that rates might be going up instead of down. The Personal Consumption Expenditures Index, the Fed’s preferred inflation gauge, rose 3.8% in April, up from 3.5% in March and the highest reading in nearly three years. Core PCE, which strips out food and energy, came in at 3.3%, still well above the Fed’s 2% target.
Mark Zandi, chief economist at Moody’s Analytics, points to two reasons for the current inflation surge: Trump-era tariffs, which were already squeezing household budgets before the war began, and the oil shock triggered by the conflict with Iran. Energy prices alone accounted for more than 40% of the month-to-month increase in consumer prices in April, and those costs have since spread into groceries, airfares, and delivery prices.
Warsh recently said, “Addressing the current inflation may necessitate raising interest rates.” At its June 16–17 meeting, board members voted unanimously to hold the rate at 3.5% to 3.75%. In the updated grid of officials’ rate projections, nine of the eighteen participating members penciled in a rate hike before the end of 2026. The median projection was 3.8% by year-end, up from 3.4% in March. Any cuts have been pushed to 2027 at the earliest.
The Impact of Behavioral Economics
Underneath these economic forces and consumer behavior is a lot of fear. When people expect prices to keep rising, they tend to buy now rather than wait, particularly on large purchases like homes and vehicles.
We saw the same pattern when inflation hit 9% under the Biden administration. Even as prices began falling, many people refused to believe it. They were anchored to the high number they had experienced and unable to update – even when the data changed. That same anchoring bias applies in reverse today, with many people treating rising inflation as a permanent condition rather than a trend that may shift.
Two other cognitive biases may also apply. One is loss aversion, the tendency to feel the pain of a potential future loss more sharply than the benefit of a possible future gain. Another is present bias, the pull to act now to avoid future pain, even when that future is uncertain.
Those two forces explain why people may rush to buy ahead of inflation, and why that rush is self-defeating. More demand meeting unchanged supply pushes prices higher, feeding the very inflation people are trying to outrun. The falling savings rate, down to 2.6% in April from 3.2% in March, confirms that households are spending rather than saving, which only deepens the pressure.
Navigating Personal Financial Decisions
With the more likely scenario now appearing to be rates holding at current levels or moving higher, what might this mean for you as a consumer?
It could affect decisions that impact your household budget, such as whether to refinance an adjustable-rate mortgage or to act on or delay large purchases. No one can guarantee which choices will be best for your financial future. I do suggest considering them thoughtfully. Do your best to make them, not out of anxiety over the broader economy, but in the context of your own family’s needs and finances.
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Rick Kahler, MS, CFP®, CFT™, CeFT®, is the founder of Kahler Financial Group, a Rapid City, SD-based fee-only Registered Investment Advisor.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
