The Case Against Raising Interest Rates

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Executive Summary

Inflation concerns are overstated due to measurement distortions, real economic fundamentals remain sound, and rate increases would not achieve their intended outcomes. Leading investment strategists and Fed officials align on a single message: patience, not action is the appropriate policy response.

Inflation Measurement Distortions

Core CPI for August sits at 2.3% year-over-year—essentially in line with the Fed's 2% target. The apparent gap between CPI and PCE is driven by just two items:

• Financial services fees (~60% of PCE gap) - portfolio management, not experienced by average consumers

• Flash memory prices - up 9 standard deviations, irrelevant to consumer inflation perception

The verdict: Core PCE's 3.3% reading is a measurement error, not broad-based inflation.

Source: Fundstrat Global Advisors, Federal Reserve analysis

Corporate Credit Markets Show No Distress

High-yield credit spreads (OAS) are behaving normally—signaling healthy corporate fundamentals. This is the single best indicator of economic trouble.

High-yield spreads are significantly more reliable predictors of recession than the yield curve (which predicted 2 of last 9 recessions)

What this means: If the economy were deteriorating, the market most sensitive to credit risk would show warning signs. It's not.

Source: Fundstrat Global Advisors

Rate Hikes Won't Solve AI Infrastructure Build

AI hyperscalers justify their capex based on expected returns, not fed funds rates. They could justify spending even with rates 100 basis points higher.

The infrastructure build is addressing decades of underinvestment post-GFC, not demand-pull inflation

The reality: This is supply-side investment filling a genuine gap, not speculative excess.

Source: Tom Lee, Fundstrat Global Advisors

Gasoline Burden Remains Below Historical Norms

Despite recent geopolitical oil spikes:

• Current: 2.2% of household spending

• 65-year average: ~3%

• GFC crisis era: 4.5%

Key takeaway: Energy costs are not a demand-driven inflation pressure point.

Source: Fundstrat Global Advisors analysis

Consumer Inflation Expectations Anchored

Multiple surveys show declining inflation expectations:

• NY Fed inflation expectations: Down 3 months in a row

• NFIB survey: Business inflation concerns trending downward

• Conference Board & Umish: All confirming the downtrend

Why it matters: Anchored expectations mean no wage-price spiral risk, supporting a hold position.

Source: Federal Reserve, NFIB, Conference Board

Labor Market is Healthy but Globally Constrained

August jobs report exceeded expectations, yet global labor growth remains slow. This is not a "hot labor market" problem—it's a structural constraint.

Raising rates would worsen labor scarcity, not improve it

The solution: AI addresses this gap by filling empty jobs, not creating demand-pull inflation.

Source: Fundstrat Global Advisors, BLS data

Growth is Broadening Across Sectors

Economic expansion shows:

• Strong earnings visibility backed by AI and ISM recovery

• Small-cap outperformance indicating breadth

• No signs of unsustainable boom dynamics

Market signal: This is healthy rebalancing from underinvestment, not inflationary excess.

Source: Fundstrat Global Advisors, Russell indexes

Fed Policy Remains Disinflationary

According to Fed Governor Chris Waller and other officials:

Current monetary policy is still disinflationary in its stance

The implication: No urgency exists for preemptive rate hikes. Patience is warranted.

Source: Fed Governor Chris Waller, recent Reuters commentary

Supporting Sources & Expert Opinion

Fundstrat Global Advisors - Tom Lee, CIO

Position: Strong advocate for Fed holding rates steady

"I think economists are fighting last year's wars... The Fed's targets 2% year-over-year. Core CPI for August is likely to come in around 2.3%. Well, that's not too off the Fed's target. So, I think it makes sense the Fed should be a little more patient."

Tom Lee points to the 100 basis point gap between Core PCE and Core CPI, driven almost entirely by financial services fees (60%) and flash memory prices. This represents measurement distortion, not broad inflation.

Source: Tom Lee, Wealthy Podcast Interview, September 2026

Federal Reserve Governor Chris Waller

Position: Leaning towards holding, data-dependent

"August... I'm leaning towards not hiking and it's all going to come down to August CPI. If there's continued progress on inflation, I'm going to advocate for hold. If it's a hot August print, I'd consider a rate hike. The current policies are still disinflationary."

Waller's recent Reuters commentary acknowledges the PCE measurement issue and the fact that inflation hasn't been at the Fed's target for more than four years—yet current policy remains disinflationary.

Source: Federal Reserve Governor Chris Waller, August 2026

High-Yield Credit Markets Consensus

Position: Corporate fundamentals healthy; no recession pricing

High-yield OAS (options-adjusted spreads) are the most reliable market indicator of economic distress. Currently showing healthy corporate credit quality with no signs of deterioration. This consensus view from the market most motivated to price in economic risk suggests confidence in the current trajectory.

Source: Market data aggregation, Credit analysis

Small Business Optimism Surveys (NFIB)

Position: Inflation concerns declining

"Inflation as a problem for business was really high in 2022, spiked early this year because of the Iran war, but it's actually trending down. Same thing with prices planned increases."

The National Federation of Independent Business survey shows both past inflation perceptions and future price increase plans are declining significantly—the opposite of what would justify rate hikes.

Source: NFIB Small Business Optimism Index, September 2026

New York Federal Reserve Consumer Expectations Survey

Position: Inflation expectations falling

The NY Fed's survey shows inflation expectations have declined for three consecutive months. This is critical—anchored expectations are the foundation for price stability without aggressive tightening.

Source: Federal Reserve, NY Fed Consumer Expectations Survey, 2026

Conference Board & Umish Survey Data

Position: Corroborate downward inflation trend

Multiple independent surveys (Conference Board, Umish) all show the same pattern: inflation expectations declining. This convergence of data sources strengthens the case for monetary patience.

Source: Conference Board, Umish Economic Surveys

AI Infrastructure Investment Analysis

Position: Post-GFC recovery, not speculative excess

"For more than a decade, private investment as a percentage of GDP was actually below depreciation. In other words, capital stock was depleted in the US... Buildings got really old, roads got really old... AI is actually filling this gap in jobs."

The current capex boom represents the necessary recovery from chronic underinvestment, addressing real supply constraints and labor market gaps. Monetary tightening is counterproductive in this context.

Source: Tom Lee, Fundstrat Global Advisors

The Bottom Line

Real inflation (Core CPI) is at or near the Fed's 2% target—measurement distortions account for PCE elevation
Corporate credit markets show no economic distress or recession risk
Rate hikes won't achieve their goals—AI infrastructure spending is economically justified regardless of rate levels
Consumer expectations are anchored—no wage-price spiral developing
Energy and labor costs are either contained or represent structural rather than demand-driven pressures
Current policy remains disinflationary—no urgency for tightening
Growth is healthy and broadening—not overheating
The risk of rate hikes now outweighs the benefits