CPI Still Running Hot — The Fed Can’t Afford to Cut Rates

Originally posted on Substack. 

The July Consumer Price Index report confirms what many of us have been warning for years: inflation remains too high, and the Federal Reserve should resist the growing calls from President Trump and others to lower its target interest rate.

The Bureau of Labor Statistics (BLS) reported that consumer prices rose 0.2% in July and 2.7% year-over-year. While some cheer that this is below the peaks of 2022, the details show why the inflation fight isn’t over — and why cutting rates now would be a major policy mistake similar to that of the Great Inflation during the 1970s.

Shelter costs — the largest component of the CPI — were up 0.2% in July and 3.7% over the past year, continuing to put pressure on household budgets. Core CPI (which excludes food and energy and is watched closely by the Fed) rose 0.3% for the month and is running at 3.1% year-over-year, well above the Fed’s 2% flexible average inflation target.

Food away from home continues to rise 3.9% year-over-year, and medical care services increased 0.8% in July alone.

This is not “mission accomplished” territory. It’s more like “inflationary trench warfare.”

The Fed’s Real Problem: Its Balance Sheet

The real driver of persistent inflation isn’t a mystery — it’s the Fed itself. The Fed’s balance sheet now sits at $6.6 trillion, down from the nearly $9 trillion peak during the COVID lockdowns but still far above the $4 trillion pre-pandemic level (Fed data). That’s ~23% of GDP being steered by unelected central bankers, distorting credit markets, propping up asset prices, and undermining the purchasing power of the dollar.

This massive balance sheet expansion was used to monetize unprecedented federal spending under both the Trump and Biden administrations — flooding the economy with cheap money that helped trigger the price spikes we’re still paying for today. Unless the Fed aggressively unwinds these holdings, inflationary pressures will keep simmering.

Why Rate Cuts Now Would Be Dangerous

The Fed’s current target range for the federal funds rate is 4.25–4.50%, and there’s a growing chorus — including two dissenters at the latest FOMC meeting — calling for cuts. They’re making the same mistake they made in 2021 when they claimed inflation would be “transitory.”

Here’s the reality:

• Inflation has been above the Fed’s 2% target since March 2021.
• The Fed’s target is “flexible,” but flexibility doesn’t mean tolerating a three-year miss, especially on the high side.
• Cutting rates now would further fuel asset bubbles, weaken the dollar, and penalize savers while inflation remains above target.

The Fed should hold rates steady until inflation is consistently below 2% for several months — and even then, only if the balance sheet is meaningfully smaller.

The Bigger Picture: Monetary Manipulation Hurts the Poor Most

Inflation isn’t just a number — it’s a hidden tax that hits low- and middle-income Americans hardest. Renters see it in higher lease renewals. Families feel it at the grocery store. Workers see their raises disappear before they even reach their bank accounts.

And because the Fed’s money creation and bond-buying funnel disproportionately flows into financial markets, the benefits accrue to those who already hold assets, thereby widening inequality. Meanwhile, political games at agencies like the CFPB, with the Chopra Rule, and harmful state-level interventions (such as interchange fee carveouts and credit card interest rate caps) make credit more expensive and less accessible, compounding the damage.

What Needs to Happen Now

The Fed has one job it can control: the money supply. It can’t reform Congress’s spending addiction, but it can stop enabling it.

Key steps:

• Cap the Fed’s balance sheet at 6% of GDP and commit to steady reductions.
• Maintain the current target interest rate until inflation is well below 2% for a sustained period.
• End mission creep into climate policy, ESG, DEI, and other political causes.
• Full independent audit for transparency until elimination.

These reforms would restore credibility, stabilize prices, and lay the groundwork for deeper changes — including a long-term plan to end the Fed’s monopoly on money.

Bottom Line

The Fed’s oversized balance sheet is still having a greater impact on the economy than the interest rate it sets. Until that intervention unwinds, inflationary pressures will linger — and any premature rate cut will exacerbate the situation. This is a moment for monetary discipline, not political expediency.