Have you noticed how quickly the conversation flips from “inflation is cooling” to “maybe we should hike again in September”? I have. It happens every time a single print looks sticky, even when the underlying story is far less dramatic than the headlines suggest. In my experience, that is when policy risk quietly shifts from fighting prices to fighting the people who did not create those prices.
The Case Against A September Rate Increase
Three officials wanted tighter policy in July. The broader committee still held the target range near the mid-three percent area. That split matters. It tells you the room is not united, yet markets keep pricing another move as if the diagnosis were settled. Across the Atlantic, another 25-basis-point step already arrived in June, and another September lift is treated as almost automatic. I think that reflex is the problem.
The diagnosis is wrong on both sides of the ocean. There is no classic overheating. There is no private credit binge. There is no runaway private money machine. What we have is a messy mix of an imported energy shock and a fiscal problem that monetary tools cannot tidy up. Raising the policy rate will not drill a new well. It will not refill a gas pipeline. It will, however, make life more expensive for mortgage holders and small firms.
No interest rate has ever created a barrel of oil or a cubic meter of gas.
That line is blunt on purpose. Higher official rates do not make energy cheaper. They squeeze demand for everything else. If the spike is temporary and imported, the hike arrives late, hits the wrong target, and leaves the original shock untouched.
Soft Growth Is Not An Overheated Boom
Look at the growth pulse first. The United States expanded at a 1.5 percent annual rate in the second quarter after 2.1 percent in the first. That is not a breakneck expansion. Federal spending is broadly flat. Nonfarm payrolls slipped by 23,000 in July, and the yearly pace of job creation sits below what the economy can sustainably absorb. This is not a red-hot labor market begging for another squeeze.
Europe looks worse. Euro area output rose 0.4 percent in the second quarter, but a 3.9 percent quarterly jump in Ireland inflated the headline. Strip that out and growth was closer to 0.3 percent. Use modified domestic demand, the measure many officials treat as closer to real activity, and the bloc is barely crawling at about 0.1 percent in the second quarter, with similarly weak readings expected later in the year. Germany, France, and Italy each managed 0.2 percent after a contraction for the bloc in the first quarter.
Official projections for 2026 sit near 0.8 to 0.9 percent. Unemployment is 6.3 percent, with more than eleven million people out of work. I keep coming back to a simple question. If this is overheating, what would a cold economy look like?
Private Credit Is Already Cooling
The lending cycle has already turned. In the United States, commercial and industrial loans grew at a 15.8 percent annualized pace in April, then 10.8 percent in May, 4.0 percent in June, and minus 1.1 percent in July. That is not a boom that needs another official shove. It is a boom that already faded.
In the euro area, bank surveys show tighter credit standards for firms. Banks cite higher perceived risk, especially in the car industry and energy-intensive manufacturing. Household loan demand fell. Tightening is happening in the market itself. Central banks do not need to pile on just to prove they are serious.
- Business loan growth has slowed sharply and even turned negative in recent data.
- Banks are already tightening standards on risk, not because officials demanded theater.
- Households are asking for fewer loans, which is the opposite of a credit party.
- Energy-heavy manufacturers feel the pinch first, long before a September meeting.
I’ve found that people confuse “credit is no longer frozen” with “credit is excessive.” Those are different statements. After years of stagnation, a modest rebound in lending can look lively on a chart. It is still normalization, not a bubble that must be popped in September.
Money Growth Does Not Support The Overheating Story
Monetary statistics published recently undercut the idea of a private money surge. Broad money in the euro area grew 3.4 percent year on year in July after 3.3 percent in June, averaging about 3.2 percent over three months. Narrow money slowed to 3.1 percent from 3.5 percent. Real output is up about 1.0 percent year on year, with a deflator near 3 percent. Money is running at or below the pace of nominal activity.
Adjusted loans to households rose 3.1 percent. Loans to non-financial companies rose 4.4 percent. Again, that looks like a thaw after a long freeze. Bank claims on governments actually fell by 0.5 percent. If there is an excess, it is not coming from private balance sheets in the way a 1970s-style boom would.
United States money growth looks faster at first glance. M2 reached about $23.22 trillion in July, up 5.4 percent from a year earlier. That still sits below the old trend you would expect in a healthy expansion. More important is the source. Lending data do not show a private credit explosion. What you see is a reserve regime that keeps accommodating a heavy calendar of Treasury issuance.
The central bank balance sheet still holds roughly $6.7 trillion in credit. Bank reserves sit near $2.94 trillion. The overnight reverse repo facility has been drained to under $1 billion. Officials still say they want ample reserves. Fine. Just do not pretend that setup is the same thing as households maxing out credit cards for a shopping binge.
What the money picture actually shows: Private lending: cooling, not exploding Public issuance: still heavy Reserves: kept ample on purpose Reverse repo: almost empty Inflation impulse: energy first, not broad private excess
Prices Are Sticky Where Energy Is Sticky
Headline consumer prices in the United States eased to 3.4 percent in July. Core inflation fell to 2.5 percent. Energy prices were up 14.7 percent over twelve months. That mix should stop anyone from treating the entire basket as a domestic wage spiral.
Euro area inflation was 2.9 percent in July. The breakdown is even more revealing. Energy was up 10.0 percent. The index excluding energy was 2.2 percent. Food, alcohol, and tobacco sat at 1.2 percent. Non-energy industrial goods were just 0.9 percent. Both sides of the Atlantic keep pointing to conflict in the Middle East as the spark. If that is the story, a policy rate is a blunt instrument.
Oil has already started to correct in recent weeks. Hiking into that correction would be like slamming the brakes after the curve. Consumer spending in the United States decelerated in July and was roughly flat once you adjust for prices. Demand is not ripping. It is negotiating with a higher energy bill.
| Price measure | Latest reading | What it signals |
| US headline CPI | 3.4% | Cooling, still lifted by energy |
| US core inflation | 2.5% | Closer to target than the scare charts imply |
| US energy, 12 months | +14.7% | Imported shock, not a credit party |
| Euro area headline | 2.9% | Sticky mainly where fuel is sticky |
| Euro area ex-energy | 2.2% | Much less drama than the headline |
| Euro industrial goods ex-energy | 0.9% | No runaway goods boom |
Perhaps the most interesting aspect is how quickly the energy component can dominate a meeting. Officials talk about second-round effects, and they should. But second-round effects are not automatic. They depend on slack, credit, and whether households can keep spending. Right now those conditions look fragile, not frothy.
Who Actually Pays When Policy Tightens
Here is the part that bothers me most. Monetary tightening is being loaded onto families and small firms while the machinery that cushions sovereign borrowing stays in place. One official tool remains available to intervene in government bond markets. Excess liquidity in the euro system still stands near €2.1 trillion. In the United States, reserves stay ample and the balance sheet remains nearly triple its pre-2008 size relative to output.
Sovereign risk spreads stay compressed. Governments do not face the same market discipline as a bakery that needs a working-capital line. When official rates rise, finance ministries do not suddenly discover thrift. They roll the cost onto taxpayers and keep spending. The private sector, the part that actually hires and invests, absorbs the hit twice: first through dearer credit, then through a heavier tax burden later.
A hike becomes tightening for the productive economy and a shrug for the state.
That is why I do not buy the tidy story that one more September move will “finish the job.” No government cuts spending because the policy rate ticked higher. Higher debt service does not deliver budget control. It delivers a larger claim on future private income. You get a double punishment: scarcer credit and, down the road, more tax pressure. Energy prices remain untouched.
The Fiscal Channel Officials Prefer Not To Discuss
If the goal is lasting price stability, the cleaner path is not another squeeze on mortgages. It is less subsidy for public borrowing. Shrink the balance sheet faster. Drain excess liquidity with more honesty about the fiscal driver. Remove the backstops that let sovereign paper trade as if default risk were a museum piece. That would be uncomfortable. It would also be coherent.
Instead, the political temptation is always the same. Raise the rate that households feel. Leave the facilities that keep government funding smooth. Call it independence. Watch the private sector do the adjustment. I have seen this movie enough times to recognize the ending. Growth slows, deficits stay wide, and then someone wonders why inflation did not behave like a classroom model.
- Identify whether inflation is domestic demand or an imported cost shock.
- Check private credit and money, not just the headline consumer index.
- Ask whether sovereign funding is still being shielded from market prices.
- Only then decide if a September rate hike does more good than harm.
Skip those steps and you get policy that looks tough on television and sloppy in the real economy. Toughness is not the same as accuracy.
Why Markets Keep Betting On A Hike Anyway
Several large banks still expect a September increase. That expectation has a life of its own. Once a meeting is framed as a test of credibility, officials hate looking late. Markets know that. They price the hike not because the data scream emergency, but because the reaction function has become a habit.
Habits can be expensive. If growth is already soft, credit is already tighter, and energy is already the main villain, another 25 basis points is less a precision tool than a signal. Signals matter. They also have collateral damage. A small business rolling a floating-rate facility does not care that the statement used careful adjectives. It cares that the payment went up.
There is also a timing problem. Energy shocks move faster than policy committees. By the time a September decision is explained in a press conference, the oil tape may have already done part of the disinflation work. Hiking then is not leadership. It is chasing last month’s narrative.
Labor Markets Look Firm Until You Watch The Edges
Payrolls can look decent in a trend chart and still fail a common-sense test. A monthly decline of 23,000 is not a collapse. It is also not a reason to talk as if every diner is fighting over dishwashers. Annual job creation running below potential is a yellow light, not a green one.
In Europe the labor picture is even less supportive of a hawkish surprise. An unemployment rate of 6.3 percent with more than eleven million people jobless is not the stuff of wage explosions across an entire currency union. Some sectors are tight. Some regions are tight. The aggregate is not a furnace.
I keep a simple rule. If you need a microscope to find the boom, you probably should not use a sledgehammer to cool it. Labor tightness that is narrow and energy inflation that is imported do not add up to a 1970s rerun. They add up to a policy error if treated as one.
Small Firms Carry A Different Kind Of Interest Rate
Large companies can tap bond markets, delay projects, or lean on cash. Small firms live closer to the bank. When standards tighten and official rates rise at the same time, the working-capital line becomes the story. Inventory costs more to finance. Customers pay slower. Energy bills stay high. That combination does not show up neatly in a core inflation print, but it shows up in hiring plans.
Mortgage holders are in a similar bind, especially those coming off fixed periods or sitting on variable products. They did not invade a shipping lane. They did not vote for an oversized deficit. They are being asked to deliver disinflation on behalf of a public sector that still funds itself on easy terms. That allocation of pain is not a technical detail. It is the whole plot.
In my view, this is where the credibility argument gets slippery. Credibility with bond traders is not the same as credibility with the people who keep shops open. If the private economy is the only part that actually feels the hike, the institution looks less independent than selective.
What A Better September Decision Would Look Like
Hold the rate. Say clearly that energy is the swing factor. Admit that private credit is no longer the villain. Keep the option to move later if domestic demand truly reheats. Use the meeting to talk about the fiscal-monetary mix with more honesty than usual. That would be dull television. It would also be grown-up policy.
If officials feel they must do something visible, the visible thing should be faster runoff of the securities portfolio and a clearer plan to stop treating government paper as a protected class. That is harder than a 25-basis-point lift. Harder is not a reason to avoid it.
- Pause on the policy rate while energy prices correct.
- Watch loan growth and money, not just one inflation print.
- Let sovereign spreads reflect more of the true fiscal risk.
- Protect the productive economy from becoming the residual shock absorber.
None of this is a plea for cheap money forever. Easy policy after a fiscal surge created its own distortions. The point is narrower. September is the wrong month, and the rate is the wrong tool, for an energy-and-budget problem dressed up as private excess.
The Risk Of A Double Slowdown
Imagine the next two quarters. Energy cools a bit. Core goods stay sleepy. Services ease only slowly. Officials hike anyway. Credit standards tighten another notch. Households cut discretionary spending. Small firms freeze hiring. Growth slips from soft to stall-speed. Inflation falls, but so does the tax base. Deficits widen. Then the same institutions face pressure to ease, having just proved they can be late in both directions.
That sequence is not destiny. It is a plausible cost of treating every sticky headline as a dare. I would rather see a missed hike than a needless dent in private activity. Missed hikes can be corrected. Damaged credit relationships take longer to repair.
There is a human texture to all this that models flatten. A rate is a number in a statement. For a contractor it is the difference between taking a job and walking away. For a family it is the difference between refinancing and staying trapped. Policy that ignores that texture can still claim victory on an inflation chart. Victory of that kind is thin.
Reading The Next Inflation Prints Without Panic
The useful habit before September is to split every release into energy and everything else. If the residual is calm, the case for a hike shrinks. If wages accelerate across a broad set of industries while unemployment keeps falling, the case grows. Right now the first pattern is closer to the data than the second.
Watch commercial loan growth. Watch household demand for credit. Watch whether bank claims on governments keep shrinking or start rising again. Those series tell you more about excess than a single core services line that everyone has already memorized.
And watch fiscal issuance. If the public sector keeps flooding the market while the central bank keeps reserves ample, money can look “too high” without households having done anything reckless. Blaming the household for that mix is convenient. It is not analysis.
A Plain-Language Test For September
Ask four questions in ordinary language. Is the economy overheating, or is it limping with a higher fuel bill? Is private credit running hot, or is it already slowing? Is money growth a private boom, or a mirror of public issuance? Will a higher policy rate change the energy complex, or only the cost of being a borrower?
If your answers are limp, slowing, public, and only the borrower, a hike is not courage. It is a category error. Category errors are how institutions lose the plot while sounding responsible.
Tightening that spares the state and burdens the people who still create jobs is not anti-inflation policy. It is a transfer.
Transfers can be defended in politics. They should not be sold as monetary science. The science, such as it is, says match the tool to the shock. An imported energy shock plus a fiscal overhang is not a private credit shock. September should reflect that difference.
What Readers Should Watch After The Meeting
Whatever the decision, the statement language will matter more than the adjective count. Look for any hint that officials still see overheating where the activity data show fatigue. Look for any admission that energy, not domestic excess, is doing the heavy lifting. Look for silence on the balance sheet and sovereign backstops. Silence there would tell you the private sector remains the designated shock absorber.
Investors will price the path of future moves within minutes. Households will price them over the next reset date on a loan. Those clocks are not the same. Policy that only watches the first clock will keep being surprised by the second.
I do not expect a sudden burst of fiscal virtue because a committee stayed on hold. I do expect less damage. Sometimes less damage is the adult outcome. In a year of weak European growth and only modest American momentum, that should not sound radical.
The Mistake In One Paragraph
A September increase would treat a soft economy as if it were overheating, treat cooling private credit as if it were a boom, and treat an energy spike as if a higher policy rate could invent supply. It would leave public borrowing insulated and push the adjustment onto mortgage holders and small firms. That is not a strategy for durable stability. It is a strategy for looking busy. Busy is not the same as right.
If officials want inflation down in a way that lasts, they will have to stop confusing the borrower with the budget. Until that happens, each extra hike is less a victory over prices than a fine levied on the part of the economy that still works. That, to me, is the monumental mistake waiting in September.
