US growth at six-month high strengthens Fed rate-hike case

The largest segment of the US economy expanded in August at its quickest clip since February, a fresh signal that the six-year-old expansion retains momentum even as inflation at 3.7 percent and a new round of White House tariffs complicate the Federal Reserve's rate calculus.

"If inflation comes in hot, I would consider a rate hike," Christopher Waller, a Federal Reserve governor, said Thursday, pointing to the August consumer price report due Sept. 11 as the deciding factor for the central bank's Sept. 15-16 meeting. Waller said borrowing costs are only "slightly restricting" consumer and business demand, and "it may not take much acceleration in inflation to nudge me into supporting" a rate increase.

The growth pickup arrives as Fed Chair Kevin Warsh said at the Jackson Hole symposium last week that inflation had not shown sufficient improvement and the central bank might have "more work to do." Wall Street investors sharply increased bets on a rate hike after Warsh's remarks, while stock prices rose and bond yields fell when Waller signaled openness to holding rates steady. The Fed's preferred inflation gauge, the PCE price index, rose 3.7 percent from a year earlier, with prices ticking down 0.1 percent from May to June and rising 0.2 percent from June to July.

The combination of accelerating growth and sticky inflation puts the Fed in a delicate position. If the August CPI report shows inflation cooling, Waller said he would be willing to keep the benchmark rate unchanged at 3.50-3.75 percent. But if price pressures persist, the central bank could raise rates at its September meeting, a move that would ripple through equity valuations, mortgage rates, and corporate borrowing costs across the world's largest economy.

The growth data arrives as the Fed navigates its first tightening cycle under Warsh, who took over from Jerome Powell on May 22. Warsh's June FOMC dropped the 2026 rate cut from the projections and pointed toward a possible hike, and his Jackson Hole speech reinforced that hawkish stance. New York Fed President John Williams said Wednesday he has been encouraged by recent inflation data but would like to see more evidence it is declining, suggesting he would also be willing to hold rates steady this month.

"I think that we have to wait and see," Williams said in a CNBC interview. "There's no clear signs right now whether monetary policy currently is sufficient to make sure we bring inflation back to target in the next year or two, or whether you need to see further action to do that."

The resilience of the six-year-old US expansion provides the Fed with room to tighten without triggering a recession, but it also removes the argument that weak growth should stay the central bank's hand. The last time the Fed faced a similar choice between growth momentum and inflation control was in 2022, when it delivered a series of rate increases that ultimately pushed the fed funds rate to its peak before the current easing cycle began.

The new tariff round adds another layer of complexity. Higher import costs feed directly into producer prices and eventually consumer prices, potentially accelerating the very inflation the Fed is trying to contain. Corporate margins face pressure from both directions: input costs rising from tariffs while borrowing costs could rise if the Fed hikes.

For markets, the stakes are clear. A rate hike at the September meeting would mark the first increase since the Fed began its current policy stance, and futures markets have already begun pricing in that possibility. The August CPI report on Sept. 11 will be the pivotal data point — if it shows inflation cooling toward the Fed's 2 percent target, the case for holding rates steady strengthens considerably. If it comes in hot, Waller's warning suggests the Fed will act.

This article is for informational purposes only and does not constitute investment advice.