The Federal reserve just raised rates in September 2026 because they want to reign in inflation. Their goal is to reduce inflation to 2% by making borrowing more expensive which should reduce the cost of goods down the line. But will it? As consumers we are realizing that relying on corporations to do the “right thing” never happens. Therefore, this rate hike may not have the effect that you think it will.
What is the Federal Reserve?
The Federal Reserve, usually called “the Fed,” is the central bank of the United States.
Congress gave the Fed what is commonly called a dual mandate, which is balancing maximum employment while maintaining stable prices. It is important to know that the goal is not to have 0 unemployment and very low prices. They have to maintain a balance to protect the purchasing power of our money. The Fed believes a good balance is keeping the inflation rate around 2%.
How does the Fed bring inflation down?
One of its biggest tools they use to help achieve this goal is the federal funds rate. Which is the target interest rate banks use to lend to each other.
Now, do not get this confused with your mortgage rate, car loan rate, or credit card APR. But it is still affected by it down the line.
When the Fed changes that rate, the effects spread throughout the financial system. Other borrowing costs often move with it.
Think of it like turning the main water valve instead of every faucet inside the house. The Fed can tighten or loosen the valve. Thus it changes the pressure going into the whole pipe system.
Are we using too much water (high inflation)? Let’s tighten the valve (raise rates).
Too little water? Then let’s loosen the valve.
Why did the Feds raise rates, now?
The latest Consumer Price Index data from the Bureau of Labor Statistics showed that consumer prices were 3.4% higher in August 2026 than they were a year earlier. Prices increased 0.4% in August alone.
As a result, on September 16, 2026, the Federal Reserve raised its target federal funds rate by 0.25 percentage points, to 3.75% to 4.00%. This makes it the first rate hike within the past 3 years. The rumor is that there may be more raises coming by the end of the year.
How does raising rates reduce inflation?
Increasing the interest rates makes borrowing money more expensive. For businesses, higher borrowing costs can delay expansions, hiring, equipment purchases, real estate projects, and other investments. For households, it discourages them from borrowing and spending. The Fed is counting on the supply and demand economic model.
Less spending means less demand.
And the theory goes like this:
Less demand → less pressure on businesses → slower price increases → lower inflation.
However, history has shown us how big corporations like to act.
Thus it leaves us wondering…
Will the Fed rate hike bring prices down?
Here is the important part: lower inflation does not necessarily mean lower prices. It usually means prices continue rising, just more slowly.
And interest rates cannot directly force corporations to lower prices, reduce profit margins, fix supply problems, or give consumers more product for their dinero.
This is probably one of the biggest misunderstandings about inflation.
If inflation drops from 6% to 3%, prices did not decrease by 3%.
Prices are still increasing. They are simply increasing more slowly.
If something costs $100 and inflation is 6%, it might become roughly $106.
If inflation falls to 3% the following year, that does not automatically send the price back to $100.
Instead, that $106 item could become roughly $109.
This is why people can hear that inflation is “coming down” while simultaneously feeling like groceries, insurance, rent, utilities, childcare, and everyday purchases are still expensive.
Inflation can decline while the overall price level remains high.
What happened with companies during the pandemic?
Higher interest rates are designed primarily to reduce demand. But not every inflation problem begins with too much demand. We saw how complicated this became during the COVID-19 pandemic.
Inflation can also come from supply shortages, transportation problems, energy prices, labor shortages, wars, tariffs, natural disasters, production bottlenecks, housing shortages, and changes in how corporations price products.
Research published through the National Bureau of Economic Research found that supply-chain disruptions and labor constraints were major contributors to the inflation surge in 2021 and 2022.
Pandemic shortages were real. Factories closed, ports backed up, transportation networks struggled, consumers dramatically shifted their spending, and global supply chains experienced massive disruption.
Big Corp Inflated Prices
A 2024 Federal Trade Commission investigation into grocery supply chains found that “large market participants sometimes accelerated or distorted the negative effects of supply disruptions.”
The FTC reported that some large purchasers imposed strict requirements on suppliers and pushed for preferential product allocations during shortages.
The FTC found evidence suggesting some grocery businesses used rising costs as an opportunity to raise prices further, while profits remained elevated.
Now, with the tariffs that President Trump imposed and the Iran war that he started, we are seeing something similar happen. Corporations passed the cost of tariffs to consumers. They have raised prices, blaming these things. Did it have the same acceleration impact as COVID? It is still under review.
Did Big Corp cause “Greedflation?”
It is no secret that corporations are making record profits, while the average American is struggling to put food on the table. However, I can’t state that they are the sole reason for inflation, because the evidence doesn’t support it.
But it also does not support pretending corporate pricing power does not matter.
Different industries have different levels of competition, market concentration, costs, consumer demand, and ability to raise prices.
So will corporations actually lower their prices?
Here is the question I keep coming back to.
If businesses have discovered that customers will continue paying $6 for something that used to cost $4, what exactly makes them voluntarily return the price to $4? Not to mention they are reducing the quality of many of our products, yet still charging top dollar. For example, clothing companies are reducing costs by replacing natural fabrics with plastic like polyester. Check out The Financial Diet’s video on this.
Additionally, we may be unintentionally funding our own struggles, via our 401(k) and stock investing.
Now you can say competition and demand may force them. However, they own most of the “competition” as monopolies.
Businesses have an incentive to charge the highest price the market will sustainably accept while protecting their profitability.
What does this mean for your money right now?
When the Fed raises rates, corporations are not the only ones paying higher borrowing costs.
We feel it too. Credit cards and loans are going to become more expensive. As mentioned earlier, mortgage interest rates will rise. Small business loans will be more expensive affecting small business owners.
But you can understand what this environment means for your own financial decisions.
- Pay attention to variable-rate debt. Higher Fed rates can eventually affect certain credit cards, lines of credit, and other variable-rate products.
- Do not confuse falling inflation with falling prices. Build your budget around what things cost today.
- Look at the unit price. Compare ounces, pounds, quantities, or servings.
- Be careful with new debt, but do not assume all debt is automatically bad. Understand the rate, cash flow, risk, and purpose before borrowing.
- Keep investing decisions rooted in math instead of headlines. Interest rates matter, but so do purchase price, income, expenses, cash reserves, and your long-term goals.
Now it is not all negative. This is a great time to open a High Yield Savings Account, if you haven’t already. This is because your interest rate will rise.
Conclusion
The Fed raised interest rates because inflation is still above its target, and higher rates can help bring inflation down by cooling demand.
But we should stop pretending that one interest-rate lever controls every price in America.
Some inflation came from demand. Some came from supply problems. Some industries experienced expanded pricing power. Some businesses raised prices as their costs increased.
Some prices may fall as demand weakens, competition increases, or costs decline. Others probably will not.
And that is the uncomfortable part of this entire conversation: winning the inflation fight does not necessarily mean getting our old prices back.
Because financial freedom is not just knowing how to save and invest your dinero. It is understanding the economic system moving around your money so you can make decisions from knowledge instead of fear.
Related MoneyChisme resources
If this conversation has you thinking more intentionally about your money, start with my Personal Finance for Latinas: A Guilt-Free Guide to Managing Money.
For my real estate investors wondering how rates change the numbers, check out How Much Money Do You Need for a Rental Property?
FAQ: Fed rate hikes and inflation
Why did the Fed raise interest rates in September 2026?
The Federal Reserve raised the federal funds target range by 0.25 percentage points to 3.75% to 4.00% on September 16, 2026. The tighter monetary policy would support its goal of returning inflation toward 2%.
What is the current inflation rate?
The latest Consumer Price Index available as of September 19, 2026 showed annual CPI inflation of 3.4% in August 2026.
Do higher interest rates make prices go down?
Not necessarily. Higher rates are intended to reduce demand and slow the rate at which prices increase. Prices can remain high even as inflation falls.
Can the Federal Reserve force companies to lower prices?
No. The Fed influences borrowing costs, credit conditions, spending, investment, and economic demand. It does not directly set the prices charged by private businesses.
Are corporate profits responsible for inflation?
Corporate pricing and profit margins can influence inflation in some industries and periods, particularly when companies have pricing power. However, research shows pandemic-era inflation had multiple causes, including supply-chain problems, labor constraints, strong demand, production capacity limits, fiscal and monetary conditions, and changes in corporate pricing. There is no credible evidence that one factor alone explains the entire inflation surge.
