Since the Fed stopped hiking interest rates in July of 2023, the conversation seemed to be about when the Federal Reserve would cut interest rates. Naturally, this made sense. Inflation was on the decline, the economy was cooling, and the conditions that led to the fastest series of rate hikes in decades appeared to be fading.
The bond market reflected that expectation as well. The yield curve was pricing in a future where short-term interest rates would eventually move considerably lower as inflation normalized and monetary policy became less restrictive.
Something changed in 2025. The policy landscape changed. The new administration brought a very different mix of trade, tax, spending, and immigration policies, several of which economists had warned could increase demand, constrain supply, and put upward pressure on prices. This made the expected path toward lower interest rates less certain.
Despite considerable political pressure to move rates lower, Fed Chair Kevin Warsh struck a notably different tone at Jackson Hole today, making clear that the Fed still has work to do if inflation fails to move convincingly toward its target.⁴
The shift is particularly noteworthy given Warsh’s previous criticism of Jerome Powell for maintaining a similarly cautious stance on inflation and interest rates. Now sitting in the chair himself, Warsh is confronting the same reality: Inflation doesn’t care what side of the political aisle you sit on.
While the Fed is trying to slow the economy, other government policies may be pushing in the opposite direction.
So why is Warsh saying this, and what are some potential outcomes here?
Let's start with "why?".
What's keeping the pressure on?
- Tariffs are raising the cost of imported goods. Tariffs remain substantially higher than they were before 2025, increasing costs on imported products, materials, and components. CBO estimates that consumers ultimately bear about 95% of tariff costs and identifies tariffs as a contributor to higher inflation in 2026.¹
- Tax policy is supporting demand. The 2025 reconciliation law lowered taxes and provided additional incentives for businesses and households. CBO expects the legislation to boost consumer spending and private investment in 2026, supportive of economic growth, but potentially inflationary when demand is already strong.¹
- Federal deficits remain historically large. The federal government is projected to run a roughly $1.9 trillion deficit in 2026, or 5.8% of GDP, compared with an average of 3.8% over the past 50 years. Large deficits can continue supporting demand at the same time the Federal Reserve is trying to restrain it.²
- Federal spending remains elevated. CBO projects federal outlays of roughly $7.4 trillion this year, an increase of about 6% from 2025. Government spending isn't inherently inflationary, but continued fiscal support can contribute to stronger overall demand.²
- Immigration restrictions have slowed labor-force growth. Recent policy changes have significantly reduced net immigration. CBO expects this to slow labor-force growth and put additional price pressure on some service industries because fewer workers are available.¹
- Trade policy continues to change. The Supreme Court struck down the administration's IEEPA tariffs in February, but new tariffs were subsequently imposed using other authorities. As of July, new tariffs of 10% to 12.5% apply to imports from more than 80 countries, meaning trade policy continues to influence both prices and the economic outlook.
- Geopolitical conflict has pushed energy prices higher. Growing U.S. military commitments abroad add to federal expenditures at a time when the government is already running historically large deficits. At the same time, the ongoing conflict with Iran and disruptions to shipping through the Strait of Hormuz have constrained global energy supplies and pushed oil prices higher. Because energy is an input throughout the economy, from transportation and manufacturing to agriculture and utilities, higher oil prices can filter into the prices consumers ultimately pay. The U.S. Energy Information Administration expects oil prices to remain elevated until global oil flows normalize and inventories are replenished.⁵
The Federal Reserve may be trying to put the brakes on inflation while other government policies are still pressing the gas.
The Fed can't change tariffs, taxes, geopolitical events, government spending or immigration policy.
| This is an example of the constant tug-of-war between fiscal and monetary policy.
If inflation remains stubborn, that could mean rates stay higher for longer.... or even move higher again.
What Does This Mean for Investors?
Don't build a financial plan that depends on correctly predicting the Federal Reserve. Likewise, don't build one that depends on correctly predicting federal fiscal policy either.
Interest rates may fall. They may stay elevated longer than expected. And under the right circumstances, they could rise again. A good financial plan should be designed to function under more than one scenario.
Instead of asking "what will the Fed do next?" Consider asking:
| “Is my financial plan prepared for whatever the Fed does next?”
That's a much more useful question.
Bryan Yach, CFP®
Owner & Wealth Advisor, Yach Advisors
Yach Advisors provides this material for educational and informational purposes only. It should not be considered individualized investment, tax or legal advice.
Sources & References
1. Congressional Budget Office.The Budget and Economic Outlook: 2026 to 2036. February 2026.
https://www.cbo.gov/publication/62105
2. Congressional Budget Office.Director’s Statement on the Budget and Economic Outlook for 2026 to 2036. February 11, 2026.
https://www.cbo.gov/publication/62106
3. Congressional Budget Office.Updated Budgetary Projections of Tariffs as of July 31, 2026. August 20, 2026.
https://www.cbo.gov/publication/62704
4. Board of Governors of the Federal Reserve System. Kevin Warsh, “Reestablishing the Fed’s Commitment to Price Stability.” Remarks at the Federal Reserve Bank of Kansas City Economic Policy Symposium, Jackson Hole, Wyoming. August 28, 2026.
https://www.federalreserve.gov/newsevents/speech/warsh20260828a.htm
5. U.S. Energy Information Administration.Short-Term Energy Outlook. August 2026. U.S. Department of Energy.
https://www.eia.gov/outlooks/steo/archives/aug26.pdf