History should be the Federal Reserve’s best teacher in September. It has already shown what happens when central banks answer an energy shock with higher interest rates: employment weakens, investment retreats, and policymakers eventually reverse course after families and businesses have absorbed unnecessary damage. The Fed can learn that lesson now, or make working Americans pay for the same shock twice.
The clearest warning comes from the Federal Reserve itself. In 2007, Governor Frederic Mishkin explained that tightening in response to an energy-driven rise in headline inflation would push employment lower after the shock had begun to fade. A Federal Reserve model found that reacting to headlines rather than core inflation drove rates higher and unemployment up, only to require rates to be cut below baseline later. The lesson was not to ignore inflation. It was to distinguish its source before imposing the cure.
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That distinction is decisive today. Working families are already paying once through gasoline, electricity, transportation, food, and nearly everything that must be produced or moved. Another rate increase would make them pay again through more expensive mortgages, auto loans, credit cards, and business financing. It would suppress the investment needed to expand supply and strengthen growth while doing nothing to produce another barrel of oil.
The latest data make the source of the pressure impossible to ignore. In July, headline consumer inflation was 3.4%, but energy prices were up 14.7%. Core inflation, excluding food and energy, slowed to 2.5%. That is not demand running out of control. It is a concentrated supply shock raising the cost of living while underlying inflation continues to moderate.
Real people are carrying the consequences. The national average price of regular gasoline reached $4.11 on Aug. 21, nearly a dollar above a year earlier. The pressure is visible at America’s largest retailer. Walmart reported its slowest comparable sales growth in six years, while its chief financial officer said consumers were making trade-offs after gasoline rose above $4. The University of Michigan found that consumer sentiment fell to 51 in August, with especially large declines among lower-income consumers, while long-run inflation expectations held at 3.3% for a third month. Families recognize the immediate price shock, but they have not concluded that inflation will accelerate indefinitely.
Housing shows how higher rates would compound the damage. Housing starts fell 12.4% in July, and single-family starts dropped 9.9%. A typical family now needs 34% of its pretax income to purchase a new home and 36% to purchase an existing one. For a lower-income family, those shares rise to 67% and 71%. Higher rates would not make lumber, land, labor, or energy less expensive. They would make the monthly payment more punishing and the supply shortage harder to solve.
Small businesses would be first in the line of fire. They employ nearly half of America’s private-sector workforce and depend far more heavily than large corporations on bank credit, credit cards, and current cash flow. Energy costs compress their margins immediately. Higher borrowing costs then force them to postpone equipment purchases, hiring, expansion, and inventory. That breaks the growth cycle at both ends: families have less purchasing power, and the Main Street businesses that depend on them have less capacity to invest and create jobs.
Europe has already demonstrated the cost of getting this wrong. In 2011, the European Central Bank raised rates in April and July as inflation rose largely because of energy and commodity prices. By November, with growth weakening and financial stress intensifying, it reversed course and cut rates even while inflation remained elevated. The ECB’s own 2026 policy account identifies those increases and their rapid reversal as an episode from which it learned.
Monetary policy can restrain demand. It cannot reopen a shipping lane, resolve a geopolitical conflict, increase refining capacity, or accelerate domestic energy production. When constrained supply is driving the price increase, higher rates can deepen the squeeze by weakening construction, business investment, and the productive capacity that allow the economy to adjust.
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This is not a case for renewed quantitative easing or an emergency rate cut. It is a case for discipline. The Fed should hold rates steady in September, watch long-run inflation expectations and underlying inflation, and allow the energy shock to move through the economy without creating a second shock of its own.
History has already delivered the warning. If the Fed raises rates against an energy shock, it will not defeat inflation at its source. It will weaken the families, businesses, housing supply, and productive investment America needs to outgrow it. The strongest policy is not always the policy that moves. In September, strength means learning the lesson before making working people pay twice.
Dan Varroney is an economic strategist, founder and CEO of Potomac Core, and author of Rethinking Economic Growth.
