Posted  Originally on Sep 17, 2026 by Martin Armstrong |

The Federal Reserve has raised interest rates for the first time in three years, increasing the federal funds target by 25 basis points to 3.75%–4.00%. The significance is not the quarter-point move itself. The Fed spent 2025 cutting rates only to turn around and raise them again because inflation never vanished as the academics expected. Chairman Kevin Warsh says the move demonstrates the Fed’s commitment to returning inflation to its seemingly impossible 2% target, and the FOMC voted unanimously for the increase. They still cling to this theory that they can steer an $30 trillion economy by moving one interest rate up and down.

Even the Fed admits economic activity continues to expand at a “solid pace,” domestic spending remains resilient, productivity growth is strong, capital investment remains robust, and unemployment has changed little. This is precisely the problem with trying to manage an economy as if it were some laboratory experiment. People do not stop living because twelve people in Washington change the federal funds rate by 25 basis points.

The 10-year Treasury yield moved to around 5% following the decision while mortgage rates were already approaching 7%. THAT is where the pain becomes real. Housing affordability is already a disaster, borrowers are paying punishing rates, businesses face higher financing costs, and Washington must continually refinance an enormous national debt at rates dramatically above those of the previous decade. The politicians loved artificially low rates because they could borrow endlessly and pretend there would never be a bill.

Now the bill is arriving. The contradiction is that government desperately wants lower rates because it is the largest borrower in the entire economy. Washington has accumulated so much debt that rising interest rates threaten the budget itself, yet the government continues borrowing regardless of the cost because nobody in Congress has any intention of balancing anything. They spend first, borrow whatever is necessary, and then blame the Federal Reserve when the cost of servicing their own debt explodes.

This is why the Federal Reserve cannot control inflation the way these academics pretend. The Fed does not control government spending, fiscal deficits, taxation, energy, war, tariffs, shortages, or international capital flows. It can influence the price of short-term credit, but it cannot control DEMAND throughout an entire economy. It cannot stop Congress from spending another trillion dollars, force people to stop buying food or gasoline, prevent companies from investing when they see an opportunity, or manufacture oil when geopolitical events send energy prices higher.

Government itself is one of the largest sources of demand, yet the Fed has absolutely no power to tell Congress to stop spending. Raising rates instead attacks the private sector because the homeowner, small business, automobile buyer, and anyone dependent on credit feels the impact first. Government simply issues more debt and passes the higher interest expense on to taxpayers.

This is where modern monetary policy becomes absurd. Raising rates can destroy credit-sensitive demand, but it cannot cure inflation caused by shortages, taxation, government spending, geopolitical disruptions, tariffs, or energy. You can raise rates to 10%, but that will not produce another barrel of oil. You can bankrupt a homebuilder, but that will not create more housing. You can crush the consumer with higher credit-card rates, but that does not force Congress to reduce a trillion-dollar deficit. They are trying to control the temperature of the entire house by opening one window.

The Fed’s projections indicate another increase may follow this year. Whether that happens will depend on inflation, employment, energy, and capital flows, but the important development has already occurred. The easing cycle has reversed because inflation proved far more stubborn than the theories predicted.

The era of permanently cheap money was NEVER sustainable because government abused it more than anyone. Politicians accumulated mountains of debt believing rates could remain artificially suppressed forever, and now they are discovering that they cannot dictate the price at which the world will finance their spending. The Fed can move its overnight rate, but it cannot command global capital, and that distinction will become increasingly painful as the cost of servicing government debt continues to rise.