By Christopher Combs, Chief Investment Officer, Silicon Valley Capital Partners
Sept 16, 2026
1. The Cost-Benefit Equation Is Becoming More Difficult
Monetary policy is most effective against demand-driven inflation. When consumers and businesses are spending faster than the economy can sustainably produce, higher interest rates can cool borrowing, investment and consumption.
Supply-driven inflation presents a different challenge.
Tariffs, energy disruptions, shortages, geopolitical events and production constraints can increase prices regardless of domestic interest rates. The Federal Reserve cannot manufacture additional goods, resolve an overseas supply disruption or eliminate a tariff by changing the federal funds rate.
The Fed can still reduce overall inflation under those circumstances, but largely by weakening demand enough to offset the shortage of supply.
That creates an uncomfortable trade-off: The Fed may have to impose greater economic restraint to achieve a relatively modest improvement in inflation.
2. Twenty-Five Basis Points Won’t Fix a Supply Shock
Consider what actually happens with another 25-basis-point increase.
The additional quarter point does not directly increase oil production, expand manufacturing capacity, improve global supply chains or reduce the cost of imported goods. Consequently, prices being pushed higher primarily by those forces may initially respond very little to tighter monetary policy.
Instead, the rate increase works through the financial system.
Credit becomes more expensive. Mortgages become less affordable. Business financing costs rise. Consumers face higher costs for interest-sensitive purchases. Eventually, enough demand can be removed from the economy to reduce some pricing pressure.
That distinction is critical. The Fed may ultimately influence the inflation rate, but it does so by attacking demand rather than repairing supply.
If the original inflation problem is predominantly external or supply-driven, the economic price of that strategy can become increasingly high.
3. Consumers, Housing and Employment Could Absorb the Greatest Impact
The effects of higher interest rates are also unevenly distributed throughout the economy.
Housing is particularly exposed. When mortgage rates remain elevated, monthly payments rise dramatically relative to the price of the underlying home. Potential buyers postpone purchases, transaction volumes decline and activity across industries connected to residential real estate can weaken.
Consumer spending is another important transmission channel. Automobiles and other financed purchases become more expensive as credit costs increase. Retailers and consumer-oriented businesses can then experience weaker demand.
Employment represents the next potential link in that chain. Companies initially may respond to softer demand by reducing job openings or delaying hiring. If economic conditions deteriorate further, layoffs can eventually increase.
This is what makes additional rate increases particularly complicated. The sectors most vulnerable to higher rates are not necessarily the sectors responsible for the inflation the Fed is attempting to control.
The Federal Reserve may ultimately determine that further tightening is warranted, particularly if inflation remains elevated or financial-market expectations become less anchored.
But the more important economic question is not whether another quarter-point increase sounds large or small.
It is what problem that quarter point actually solves—and who ultimately bears its cost.
If inflation is primarily being driven by excessive demand, additional monetary restraint has a clear economic rationale. If inflation increasingly reflects external supply constraints, however, another rate increase risks becoming an expensive solution to a problem interest rates were never particularly well designed to fix.