When Will Monetary Tightening End? Inflation Alone Does Not Hold the Answer

Monetary tightening means, in plain terms, that a central bank raises interest rates and withdraws money from the market. Many people use inflation data to judge when this round of tightening will end. But this time, inflation does not hold the answer.

Five Institutions, Five Judgments

Five major institutions placed the end of tightening anywhere from September this year to January 2027:

- TD Securities expected the final rate increase in January 2027.

- Citi expected one more increase in September, followed by no further changes until rate cuts resumed in June 2027.

- JPMorgan expected increases in both September and December.

- MUFG put the probability of another increase in December at 55%–60%.

- Goldman Sachs excluded further increases from its baseline forecast.

Senior White House officials repeatedly called publicly for an end to rate increases in early September. Four of the five institutions left October as a pause in policy action, because the late-October meeting was only days before the November midterm elections.

Why Do the Forecasts Differ?

Goldman Sachs research argued that inflation had improved after temporary factors were excluded and that rate increases could not resolve a supply shock. But markets had already fully anticipated an increase. If the Fed chose to do nothing, it would contradict the hawkish signals it had previously sent. JPMorgan also argued that staying on hold would damage the Fed’s policy credibility.

The logic behind raising rates had shifted from how high inflation was to whether the Fed would deliver on its statements. Credibility cannot be quantified by a model, making the end of tightening difficult to calculate precisely.

The Source of Inflation Lies Beyond the Reach of Interest Rates

MUFG warned that this rate increase itself risked becoming a policy mistake.

The Fed had also discussed the issue. The minutes of its July 29 meeting noted that successive supply shocks had repeatedly delayed the expected return of inflation to 2%.

The data pointed in the same direction. Brent crude was around $107, US CPI energy prices were up 16.3% year on year in August, and diesel prices rose 24.1% in August alone, on a month-on-month basis. Higher rates can suppress demand, but they cannot bring down oil prices.

Even within the Fed, the June dot plot divided year-end rate expectations into five groups. There was no single answer.

The upcoming interest-rate decision was due at 2:00 a.m. Beijing time on September 17.

Three Things Will Determine When This Round Ends

The answer lies less in the inflation figures than in three questions:

- Does the Fed want to follow through on what it has said?

- Will the midterm elections allow it to act?

- Will oil prices turn lower on their own?

What Does This Mean for Your Money?

What can be said with confidence is that high rates are likely to persist for longer. Interest costs on new loans rise. Existing fixed-rate loans are unaffected, but floating-rate liabilities such as credit cards become more costly.

Higher Treasury yields indicate that markets are already absorbing the prospect of interest rates staying high for longer. That changes borrowing costs. It does not, by itself, answer whether to buy or sell.