NextFin News - Diane Swonk, chief economist at KPMG, says the Federal Reserve has already begun a rate-hiking cycle — a call that puts her ahead of a central bank that is widely expected this week to deliver its first increase since July 2023. The question is no longer whether the Fed will move, but whether one quarter-point is enough to restore credibility after more than five years of inflation running above its 2% target.
Swonk's call, delivered in interviews on September 16 as the Federal Open Market Committee convened in Washington, is the most pointed framing yet from a mainstream economist of what the market has been pricing for days. Where many analysts still describe the expected move as a single adjustment to a data-dependent policy, she describes a regime change: the easy-money era is over, and the burden of proof has shifted to anyone arguing for a pause.
The Call and the Numbers
Swonk's argument rests on a simple arithmetic fact: inflation has not returned to target, and it has become embedded across the economy. In a September 14 primer published before the committee's two-day meeting, she wrote in the primer:
"Inflation is still well above the 2% target. It has spread across the economy and is becoming embedded in consumer and firm behavior – exactly what the Fed must prevent."
Her conclusion follows directly:
"September's rate hike is expected to be the first in a series."
The data backs the premise. The Bureau of Labor Statistics reported on September 11 that the Consumer Price Index rose 0.4% in August and 3.4% over the prior 12 months, above the consensus forecast of 3.3%. Core CPI, which strips out food and energy, gained 0.3% for the month and 2.4% year over year. Energy prices were the accelerant, up 16.3% over the year, while food rose 2.7% and shelter costs advanced 3.0% on a 12-month basis.
Chairman Kevin Warsh made the same diagnosis in his own terms at the Jackson Hole symposium on August 28. His preferred measure, the personal consumption expenditures price index, stood at 3.7% on a 12-month basis and 4.1% over six months. At the podium he said:
"Inflation is running above our 2 percent target. So the Fed's predominant focus right now should be on prices."
The unemployment rate, at 4.1%, has barely moved for two years — the stable labor market that gives the Fed room to prioritize inflation over employment.
Markets have moved in front of the committee. Traders using CME Group's FedWatch tool assigned roughly a 90% probability to a 25-basis-point increase that would lift the federal funds target range from 3.50%-3.75% to 3.75%-4.00%, with the decision due at 2 p.m. EDT on Wednesday. The 10-year Treasury yield climbed back above 5% ahead of the decision, and Brent crude traded near $108 a barrel after rising nearly 3% on Tuesday.
Swonk's forecast is more aggressive than the consensus still captured in a September 4-9 survey of 93 economists, in which 65 of 93 — 70% — expected the Fed to hold rates steady at the September meeting, a figure down from 90% in August. The August inflation print flipped the room. So did the labor market: employers added 162,000 jobs in August, well above expectations, after a downwardly revised gain of roughly 23,000 in July. By September 14, the reversal was complete: 86 of 101 economists in a follow-up survey expected a quarter-point increase at the September 15-16 meeting, the first since July 2023.
Why One Hike Is Not Enough
The mechanism behind Swonk's call is credibility, not just the level of short-term rates. The Fed has held its policy rate at 3.50%-3.75% since January, waiting to see whether supply shocks in energy and the pass-through of tariffs would fade on their own. They have not. After more than five years above target, households and firms have begun to build persistent inflation into wage demands, pricing, and contracts. That is the behavioral channel that keeps inflation alive even when goods prices cool.
Once expectations embed, the transmission runs through the term premium — the extra yield investors demand for holding long-duration debt. Long-term rates can stay high even if the Fed cuts, because investors price in the risk that the central bank will blink. Swonk framed the paradox directly:
"A hike now could lower long-term rates later. Restore faith in the 2% target, then the inflation premium can fall. Fail, and markets will tighten instead through higher mortgage rates, business borrowing costs and interest on the debt. Blink now and investors will charge more later."
This is why the signal matters as much as the move. A quarter-point that is framed as the first step of a series does more than raise the overnight rate; it tells the bond market that the Fed is willing to accept slower growth to restore price stability. A quarter-point framed as a one-off, defensive gesture does the opposite — it invites investors to test the committee's resolve at every meeting.
The committee's own minutes show how close this debate has become. At the July 28-29 meeting, policymakers voted 9-3 to hold, with Beth Hammack of Cleveland, Neel Kashkari of Minneapolis, and Lorie Logan of Dallas dissenting in favor of an immediate 25-basis-point increase. The statement kept its pledge:
"The Committee will deliver price stability."
Three votes is a minority, but it is also a beachhead — and the August data gave the hawks more ground. The June Summary of Economic Projections showed the committee evenly split: nine of 18 participants predicted at least one hike in 2026, six of them expecting two, while eight called for no change and one for a cut. Those projections are due for an update this week, and the dots are almost certain to rise.
Cyclical Wave, Structural Regime
It is important to separate two forces that are easy to blend. The hiking cycle itself is cyclical: the Fed raises rates to cool demand, inflation falls, and policy eventually pivots back. That is mean reversion in its purest form, and it has played out in every tightening episode since the 1970s.
But the inflation regime that forced the pivot is structural, and that distinction determines how high rates must go and how long they stay. This is not a repeat of 2021, when supply-chain bottlenecks and base effects drove a spike that faded as factories reopened. The current pressure comes from a different set of drivers that do not self-correct: energy supply shocks tied to conflict in the Middle East, deglobalization and trade fragmentation, and fiscal deficits that keep aggregate demand running hot. Warsh's own Jackson Hole speech spent much of its time on a structural force running the other way — artificial intelligence and a potential productivity boom that could eventually lower costs.
The evidence for a structural shift is in the breadth of the price data. Energy is up 16.3% over the year. Shelter, the stickiest component, is up 3.0%. And 54% of the components in the PCE basket showed price increases above 3% over the past 12 months — well above the 32% average of the two decades before the pandemic, even if down from the 77% peak. These are not narrow, reversible dislocations; they are economy-wide. A cyclical claim would require three historical cycles of quick mean reversion, and the last five years have supplied the counter-example instead.
The practical implication: the neutral rate — the level that neither stimulates nor restrains — has likely risen. If that is right, the Fed is not returning to the near-zero world of the 2010s even after this cycle ends. History offers a range of precedents. The 2004-06 cycle delivered seventeen consecutive quarter-point moves, taking the funds rate from 1% to 5.25%. The 2015-18 cycle delivered nine hikes over roughly three years. The 2022-23 cycle was the fastest since the early 1980s, with 525 basis points of increases in 16 months. Swonk's call — three hikes with risk tilted toward more — sits at the gradual end of that spectrum, closer to 2015 than to 2022.
There is also a distributional dimension that the Fed cannot ignore. Inflation is one of the most regressive taxes in the economy: it hits hardest those with the least ability to absorb it, while wealthier households can earn higher yields on their savings. Swonk made this point explicitly in the primer, arguing that restoring price stability is the Fed's best way to rebuild the purchasing power that lower-income households have lost. That framing matters politically, with midterm elections in November and Republicans facing pressure to show relief at the pump and the grocery store.
The hiking path is the symptom; the higher neutral rate is the disease.
The Counter-Thesis
The strongest argument against Swonk's call is that the Fed is being asked to fight the last war. Core CPI has actually slowed to 2.4% year over year, down from 2.5% in July, and the monthly core print of 0.3% matched July's pace. On the Fed's preferred measure, the direction is what matters, and critics argue that tightening into a labor market that is already showing cracks risks a policy error.
Scotiabank economist Derek Holt put the market-driven version of this critique bluntly:
"Chair Warsh has probably boxed himself in with his high deference to markets. If you don't hike when it's priced, then when?"
The subtext is that the Fed is hiking because futures say so, not because the data compels it. Michael Feroli of JPMorgan struck a similar note, warning:
"The chair's repeated stern warnings on inflation intolerance risk institutional credibility absent some action to back it up."
In other words, the hike may be about credibility management rather than inflation control — a central bank moving to protect its reputation instead of responding to fresh evidence.
There is also the question of lags. Monetary policy works with a delay of roughly 12 to 18 months. The full effect of the rate increases already delivered has not yet hit the economy, and adding more tightening before the previous doses have worked through could overshoot on the employment side of the mandate. Swonk herself acknowledged this risk in the same primer, noting that financial stability is "the brake" and that the Fed is likely to move in quarter-point steps rather than repeating the oversized hikes of 2022. Move too fast, and hidden market fragilities could surface.
The counter-thesis is serious, but it rests on a bet that inflation will fade without further help. That bet has lost five years in a row.
What Would Prove the Call Wrong
Swonk's hiking-cycle thesis has a clear falsifying signal. If core CPI prints at or below 0.2% month over month for two consecutive months, the embedded-inflation premise collapses and the case for a series of hikes evaporates. A second, independent trigger would be the labor market: if the unemployment rate rises above 4.5% while inflation continues to cool, the Fed would face a dual-mandate conflict that makes further tightening politically and economically untenable.
There is also a calendar test. Markets currently price a second increase in December and a third early next year. If the Fed hikes in September and then explicitly signals a hold through the rest of 2026 and into 2027 — skipping December despite firm inflation — Swonk's "first in a series" framing would be wrong, and the move would have been a one-off credibility gesture after all.
What Comes Next
In the short term, the decision and Warsh's press conference will drive volatility across every asset class. A hike framed as the start of a series should support the dollar and weigh on equities, particularly rate-sensitive growth names, while long-end yields could actually fall if the credibility premium compresses. A hold, or a hike framed as data-dependent and isolated, would likely trigger the opposite move: a selloff in the dollar and a rally in stocks as traders bet the Fed has blinked.
Over the medium term, the path of the neutral rate is the variable that matters. If inflation proves structural, borrowers will face a higher cost of capital for years, and the winners will be sectors with pricing power and strong balance sheets — energy, financials, and companies that can pass costs through. The losers will be highly leveraged households and firms that refinanced in the low-rate era, plus long-duration assets whose valuations depend on cheap discount rates.
Over the long term, the question is whether the Fed can restore its 2% anchor without breaking something in the financial system. Swonk's paradox — that tightening now can loosen conditions later — only works if the committee follows through. Credibility is earned in a sequence of decisions, not in a single statement.
Base case: a 25-basis-point hike in September, another in December, and a third in early 2027, with the funds rate ending near 4.25%-4.50%. Upside case: inflation re-accelerates on energy and the Fed delivers four or more moves. Downside case: the labor market deteriorates faster than expected, core prints cool for two straight months, and the September hike stands alone.
The Fed spent five years learning that inflation does not go away on its own. Now it must learn the harder lesson: restoring credibility costs more than one rate hike, and the market will keep charging until it believes the job is done.
Data in this article reflect releases and market levels available as of September 16, 2026.
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