CEO Corner: The Fed is boxed in. Consumers may pay the price.

The Federal Reserve is in a tough spot.

Inflation remains too high. The labor market remains relatively stable. Federal Reserve Chair Kevin Warsh has made it clear that the Fed’s 2% inflation target is firm and that price stability is its responsibility.

That signals to me that the Fed is getting boxed into raising interest rates.

If it does not act at its next meeting or soon after, the Fed risks losing credibility. Signaling matters. The Fed’s ability to influence the economy depends in part on whether markets, businesses and consumers believe it will follow through on its commitments.

But raising rates carries a real cost. And that cost will not be distributed evenly.

Consumers are being squeezed from both sides

The Fed has two responsibilities: Maintain price stability and support maximum employment. Right now, the labor market appears consistent with full employment, while inflation is still running well above the Fed’s target.

On paper, that makes the decision look fairly straightforward.

From the perspective of the American consumer, it is anything but.

Inflation lifts the cost of groceries, gasoline, housing and nearly everything an American household needs. Over the 12 months ending in July, gasoline prices rose 24.6%, beef and veal rose 9.4% and coffee rose 10.3%, according to the Bureau of Labor Statistics. These are not abstract changes. They show up at the gas pump, in the grocery cart and in the choices families have to make every week. An economist would also be the first to let you know that inflation is highly regressive; lower income households bear the burden of inflation the most as more of their budget goes to these non-discretionary items. The pain is real and it is highly focused on those least able to absorb it.

At the same time, higher interest rates can raise the cost of credit cards and make new mortgages, student loans, auto loans and other forms of borrowing more expensive. Again, this hits indebted American families harder than the wealthy who have appreciating assets.

Consumers are being squeezed from both sides. They are paying more for what they buy and more for the money they borrow to pay for it.

U.S. household debt stands at approximately $18.8 trillion, including $1.26 trillion in credit card balances. That is a significant amount of debt to carry into another potential rate increase.

The Fed may decide that raising rates is necessary to bring inflation under control. I understand that argument. In fact, I think the Fed may have little choice if it wants to preserve its credibility.

But we should be clear about who will feel the consequences.

Higher rates can put life on hold

We tend to discuss interest rates in abstract terms: basis points, target ranges, trade imbalances, and market expectations.

Consumers experience them both through daily costs and through major life decisions.

Can I afford to buy a home? Can I move for a better job? Can I replace my car? Can I relocate to build a life with my partner? Can I afford to start a family? Can I pay down my credit card balance or am I barely covering the interest? Am I permanently trapped in my current mortgage?

When mortgage rates remain elevated, someone with a 3% mortgage is unlikely to move unless they absolutely have to. The next home may come with both a higher price and a dramatically higher monthly payment.

That tension creates friction throughout the economy. People remain in homes they otherwise would have left. They turn down jobs that require relocation. Young families delay buying. Homeowners can’t sell and new buyers can’t enter the home buying market due to cost inhibitions. Major life decisions are postponed because the numbers no longer work.

For households, this is about much more than paying additional interest. High rates can determine where people live, where they work and what comes next in their lives.

A K-shaped economy requires a closer look

The effects are especially stark in a K-shaped economy.

Higher rates can be great for savers and affluent households that own assets. They may earn attractive returns on fixed income while benefiting from gains in stocks, bitcoin, gold, real estate and other investments pushed higher by inflation.

For a household carrying credit card debt, trying to qualify for a mortgage or struggling to cover basic expenses, the experience is entirely different.

The headline economy can continue to grow while large groups of consumers experience something that feels a lot like stagnation. Prices remain high. Wages fail to keep pace. Borrowing becomes more expensive. When income cannot cover expenses, debt fills the gap. We’re already in an economy where real wages aren’t keeping up with inflation.

It is not enough to ask whether the Fed is keeping the economy in balance. We also have to ask which parts of the economy are benefiting and which are paying the price.

The average can look healthy, while millions of people are falling further behind.

Monetary policy cannot do this alone

There is another part of this debate that deserves more attention: The Fed cannot solve the problem on its own.

I think about the relationship between fiscal and monetary policy like driving stick shift.

Fiscal policy is the gas. Monetary policy is the clutch. To shift smoothly, you have to ease off the gas.

Instead, the federal government has kept the pedal down on spending while asking the Fed to manage inflation, maintain growth and protect employment. At the same time, the national debt has surpassed $40 trillion, creating its own enormous financing burden. Tweets or Truth Social posts aren’t the answer; it’s a fiscally responsible federal government that doesn’t spend beyond its means or engage internationally with politics that drives prices back home up at the same time interest rates are forced to keep rising. Warsh doesn’t have control of the gas pedal and the US consumer is getting run over.

You cannot keep pressing the gas and expect the clutch to do all the work.

If government spending continues pushing demand in one direction while the Fed pushes interest rates in the other, monetary policy becomes a blunt instrument. The Fed can raise rates to slow inflation, but it cannot do so without also raising borrowing costs for households, businesses and the government itself.

Until fiscal and monetary policy begin working in greater harmony, the Fed will continue facing choices in which every path creates pain somewhere.

The Fed may be right — and consumers may still suffer

This is what makes the coming decision so difficult.

The Fed could make the right decision for its inflation mandate and still create an extremely difficult environment for individual consumers.

Holding rates steady risks allowing inflation to remain elevated and weakening the Fed’s credibility. Raising rates risks adding pressure to households already carrying record debt and struggling with the cost of living.

Both things can be true.

My expectation is that the Fed will raise rates, whether at its next meeting or soon after. The economic data and Warsh’s recent statements appear to point in that direction.

But no one should mistake that decision for a complete answer to the country’s economic challenges.

Monetary policy alone cannot resolve the tension between persistent inflation, heavy government spending and record household debt. It can only decide where the pressure lands next.

Unless fiscal policy changes course, too much of that pressure will continue landing on the consumers who can least afford to absorb it.