Editorial: Tired yet of prices going up? The Fed needs to raise interest rates.

Americans don’t need to be reminded that the cost of living keeps climbing. They see it every time they fill their gas tanks, shop for groceries or pay their bills.

President Donald Trump’s Iran war has sent energy prices soaring, and his tariff attacks on America’s trading partners have jacked up costs for a slew of goods. The official inflation rate of 3.7% understates the sticker shock many Americans are experiencing.

Groceries and gasoline are way up, sure. But so are basics like housing, cars and computers, which are typically more stable. The trend has been stubbornly persistent: The latest data show the pace of monthly price increases accelerating.

The Federal Reserve will have an opportunity to address rising prices when its Federal Open Markets Committee [FOMC] meets later this month. Its mandate is to bring about full employment while keeping inflation at 2% annually — way below today’s level. The Fed raised interest rates by a quarter-point last month. The obvious follow-up is another increase.

To be clear, raising interest rates won’t bring grocery bills or gasoline prices back to where they were a few years ago. Slowing inflation means prices rise less quickly, not that they fall. And higher borrowing costs can make mortgages, car loans and credit card debt more expensive for consumers already struggling to make ends meet. But the alternative, allowing inflation to become entrenched and prices to climb even faster, could prove more painful in the long run. That’s why the Fed should seriously consider another rate increase, even if the short-term consequences are uncomfortable.

Yet the financial markets are sending a contrary message: People who put their money on the line are betting heavily against a rate increase. The Chicago Mercantile Exchange Fed Funds contract, for instance, pegs the likelihood of Fed action when it meets Oct. 27-28 at less than one in six.

Don’t Fed governors shop at supermarkets and gas stations? Evidently, there’s a disconnect between the cost-of-living crisis many Americans are feeling and Fed policymaking. The reasons why traders expect the Fed to sit on its hands sound awfully feeble from the perspective of strapped citizens watching prices go up by the day.

Trump’s newly installed Chairman, Kevin Warsh, has been tight-lipped, but Vice Chairman Philip Jefferson and New York Fed President John Williams have indicated they want to see additional data before the Fed does anything more.

San Francisco Fed President Mary Daly, meantime, sees no cause for urgency given that soaring mortgage rates and other higher borrowing costs already are slowing parts of the economy. Further, wage growth is cooling, which suggests things may be less overheated than the inflation rate suggests.

What these experts are missing, however, is the sour consumer psychology building up right now. Psychology might sound like a squishy factor to consider at a data-driven agency, but it’s crucially important.

Inflation expectations can become self-fulfilling. When households and businesses expect higher prices in the future, they act differently. Workers seek bigger pay raises to keep up with the cost of living or decide not to work at all when their meager paychecks don’t buy as much. At the same time, companies that expect inflation tend to raise their prices before it hits, which in turn boosts inflation.

The 1970s were a classic example of this so-called wage-price spiral, and it only ended when the Fed took drastic action in the early 1980s, tamping down prices while turning the industrial Midwest into a hollowed-out Rust Belt.

That awful period of inflation left scars. Research shows people who lived through the 1970s became more wary of surging prices in the future than those who lived through low-inflation times like those before the pandemic. Inflation spikes, including the one during COVID-19, can traumatize a generation forever.

The University of Chicago’s Booth School of Business recently published fresh insights on this scarring effect: “If consumers and businesses expect high inflation, it can make keeping inflation in check tougher for the Fed,” Booth wrote in a research summary.

The Fed’s efforts to jawbone inflation down without hiking interest rates tend to fall on deaf ears when the population knows just how stubborn and insidious inflation can be. “Hope doesn’t triumph over experience when it comes to inflation expectations,” Booth wrote. The Fed “can only maintain its credibility by producing results.”

With inflation running hot today, that’s an argument for decisive action. Yet the message from the financial markets is, “fuhgeddaboudit.”

Anyone who cares about America’s economic future should be concerned that Trump’s campaign against the Fed is influencing its decision-making. True, his hand-picked chairman, who has yet to earn much credibility, is but one vote of 12 on the FOMC.

If the Fed were to follow its mandate to tamp down inflation by raising rates at its October meeting, the financial markets quite likely would erupt — just days before the midterm election. Trump no doubt would denounce the Fed, and maybe do more, given his vindictive nature and previous attacks on the institution.

Fear of a lawless president should not be dictating monetary policy. The Fed needs to show its independence and do what’s right for the economy without fear or favor. Anything else will make America less competitive in the future.

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