Several years ago, when US inflation soared to a multi-decade peak, Powell bluntly warned the market that suppressing inflation would inevitably come at an economic cost. At the 2022 Jackson Hole Economic Symposium, he clearly stated that the Federal Reserve must implement strong tightening, and the impact of interest rate hikes would ultimately fall on ordinary consumers. Fast forward to September 2026, the Federal Reserve raised interest rates for the first time in three years, and discussions about the policy pains returned to the public eye. The current distinct K-shaped economic structure in the US means that the impact of inflation and interest rate hikes is no longer shared by the entire society, creating drastically different economic situations among different groups.

Energy supply shocks are driving up inflation; interest rate hikes aim to prevent price transmission.

The core driver of this round of inflation stems from energy supply shocks. The Federal Reserve's core objective in raising interest rates is to break the chain of energy price increases spreading outwards, preventing price increases in a single commodity from spreading to the entire industry chain and evolving into widespread overall inflation. Since the Middle East conflict escalated in February, international oil prices have continued to rise, while crude oil supply is not within the scope of the Federal Reserve's control. Chicago Fed President Goolsby stated that inflation caused by supply shocks is theoretically easier to manage than inflation caused by excessive demand after the pandemic, but the entire adjustment process is still far from easy. Central banks have always been teetering on the balance between curbing inflation and stabilizing employment. When upward pressure on prices persists, the Federal Reserve raises interest rates, increasing borrowing costs for residents and businesses, and compressing consumption and capital expenditures, thereby cooling aggregate demand and alleviating upward pressure on prices. However, the cost of economic slowdown will ultimately be borne by workers: increased corporate financing costs, contracted hiring intentions, reduced jobs, and in extreme circumstances, a wave of layoffs may emerge. Beth Ann Bovino, chief economist at Bank of America, once used a vivid analogy: inflation itself is a disease, and interest rate hikes are the prescription given by the Federal Reserve. The hardships of life brought by inflation are difficult to judge as one more brutal than the employment pains induced by interest rate hikes. Goolsby stated that the threshold for interest rate cuts remains high; to return to a rate-cutting cycle, solid evidence of a sustained decline in inflation towards the 2% target is necessary, and a shift to easing based solely on short-term, sporadic data improvements is insufficient. The combination of tariffs and oil price shocks harbors the risk of stagflation. The AI boom itself has evolved into a source of inflation; price pressures are no longer limited to the computing power and data center industry chain, with inflation continuing to spill over, pushing up prices in other sectors—essentially, an overheated aggregate demand. In other words, Goolsby believes that the overheated demand fueled by AI investment is spreading and pushing up prices, and the combination of tariffs and oil price shocks poses a risk of stagflation; to initiate interest rate cuts, substantial progress in a sustained decline in inflation is essential.

K-shaped economic cracks emerge: the impact of inflation and interest rate hikes is not shared by the entire population.

Household consumption contributes about two-thirds of the US economy, making it the most solid pillar of growth. Continued inflation eroding household budgets, or high interest rates suppressing large-scale credit purchases like mortgages and car loans, will lead to a contraction in consumption and drag down the macroeconomy; in extreme cases, continued shrinking consumption could even drag the US into recession. What is most alarming at present is the K-shaped economic polarization: the pressure of economic downturn is not evenly distributed among all citizens. Those holding large amounts of stocks and other financial assets have ample financial buffers due to the strong performance of the capital markets, making them more resilient to rising prices; however, wage earners who rely on wages for daily expenses have almost no safety net, and rising oil and commodity prices will directly devour their household budgets. Under the same inflationary environment, the two groups are experiencing vastly different fortunes, creating a stark divide. The Federal Reserve's tightening policies may further amplify this wealth gap.

Federal Reserve internal divisions: patient observation or decisive tightening?

Faced with the economic pain brought about by interest rate hikes, opinions within the Federal Reserve have become divided. Some officials favor a more patient policy approach, unwilling to hastily address potential broad-based inflation, hoping to allow sufficient time to observe economic developments, assess the number of subsequent rate hikes, and even evaluate whether further tightening is necessary. New York Fed President Williams suggested that policy action should not be rushed; Fed Vice Chairman Jefferson similarly believes that all policy adjustments must carefully weigh data trends, economic prospects, and both-way risks. However, this wait-and-see approach itself carries significant risks, as the Fed's key monitoring indicator remains more than one percentage point above the 2% target. Cleveland Fed President Hammarck has repeatedly warned that persistently high inflation will increase the difficulty of managing the situation, amplifying the pain for businesses and the public. On October 13th, Hammarck stated that the Fed needs to adjust monetary policy to a sufficiently restrictive level to push inflation back to the 2% target. Under the current policy stance, the time it takes for inflation to fall back to the target would exceed an acceptable range, and the market needs to anticipate further tightening measures. Hamak noted that the possibility of future interest rate hikes remains, but the timing is yet to be determined. She prefers small, frequent interest rate adjustments, which would allow businesses and households to plan their operations and finances in advance. With rising business costs, more and more manufacturers are choosing to pass on these costs to consumers; once demand constraints fail, inflation may continue to rise or remain high for an extended period. In her view, the biggest risk to current inflation is that businesses and residents are gradually developing a fixed "inflation mentality," slowly accepting high inflation as the norm. Once this expectation is formed, it will be significantly more difficult for the Federal Reserve to bring inflation back to 2%, and the market is already showing some signs of this. Regarding the rise in US Treasury yields, Hamak attributed it to upward revisions in economic growth expectations, market repricing of Federal Reserve policies, fiscal pressure, and a large-scale supply of Treasury bonds. She also mentioned that the data center investment boom is supporting economic growth, but financial conditions still need to be further tightened to suppress inflation. Finally, she reiterated the unwavering importance of the Federal Reserve's independence. The Federal Reserve is at a crossroads: assessing how much tightening pain the economy can withstand, and comparing the destructive power of "tightening too early" versus "waiting too long." Regardless of which path is ultimately chosen, ordinary consumers will most likely bear the corresponding costs. The upcoming September CPI data will become a key benchmark for the Federal Reserve to assess the inflation situation.