Rates must reflect inflation risks

Considering the price pressures in the economy and recent inflation projections, adjustments to the policy rates are needed.

3 min readSep 18, 2026 06:00 AM IST First published on: Sep 18, 2026 at 06:00 AM IST

In line with expectations, the US Federal Reserve has raised interest rates by 25 basis points, lifting the target range of the federal funds rate to 3.75 to 4 per cent. The rationale behind the decision, which all committee members supported, is straightforward — inflation remains uncomfortably high. As Fed chair Kevin Warsh also acknowledged, “The plain fact is that inflation is too high and has been for too long.”

In August, US consumer prices rose 0.4 per cent on a seasonally adjusted basis (keeping the 12-month rate at 3.4 per cent), according to the US Bureau of Labour Statistics. Inflation was driven, in large part, by energy prices. Gas prices in the US are at $4.43 a gallon, while diesel prices are at roughly $6.4, up from $3.7 a year ago, fuelling price pressures across the economy. The decision to raise rates is, however, at odds with US President Donald Trump’s desire for looser monetary policy. Only a few days ago, Trump posted on a social media platform,“High interest rates put the USA at a very unfair disadvantage, and I won’t allow that to happen”. The 10-year US bond yield is hovering around 5 per cent. Trump has, in the past, also rallied against the previous Fed chair Jerome Powell over the central bank’s interest rate decisions. Following the Fed’s decision, he posted, “LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!”. But, considering the projections — inflation, based on the personal consumption expenditures price index, has been pegged at 3.7 per cent in 2026, 2.3 per cent in 2027 and 2.1 per cent in 2028 — it raises the odds of further rate hikes. A healthy labour market — surpassing expectations, 1.6 lakh jobs were added in August, while the unemployment rate remained at 4.1 per cent — will give greater space to policymakers to tackle inflation.

The US Fed is, however, not alone. Central banks across the world are also tightening rates. Last week, the European Central Bank also hiked interest rates by 25 basis points as it sees inflation remaining “well above target for an extended period”. Their decisions come only weeks ahead of the October meeting of the RBI’s monetary policy committee. Considering the price pressures in the economy and recent inflation projections, adjustments to the policy rates are needed.