More than five years after the inflationary wave that followed the COVID-19 pandemic began, the problem facing the U.S. economy is no longer simply an exceptional and temporary surge in prices. It has increasingly become a question of whether the country at the center of the global financial system can return inflation to the level it considers consistent with price stability. The Federal Reserve has set a 2 percent target and has relied primarily on interest rates to reach it. Yet July 2026 marked the 65th consecutive month in which inflation remained above that threshold, with the Personal Consumption Expenditures Price Index rising to 3.7 percent year on year and the core index, which excludes food and energy, holding at around 3.3 percent. Those figures suggest that declaring the inflation battle over would be premature, even though the United States has moved well away from the sharp price increases recorded during the early years of the crisis.
The problem is not that monetary policy has produced no results. Inflation is no longer at the levels that once raised fears of a broader loss of control over prices, and the U.S. economy has managed to avoid the deep recession many had expected as a consequence of monetary tightening. The problem, rather, is that inflation has not declined to the point at which the Federal Reserve can declare that price stability has been restored. That distinction between reducing inflation and eliminating persistently high inflation lies at the heart of the current debate. U.S. policy can be regarded as successful in preventing the worst-case scenario, but it appears less successful if the benchmark is achieving the official 2 percent target within a reasonable period. More than five years of above-target inflation also risks making higher inflation rates increasingly embedded in the expectations of households, businesses and financial markets.
This assessment is no longer confined to critics of the central bank. Federal Reserve Chair Kevin Warsh placed the institution itself at the center of responsibility when, in his Jackson Hole address, he said the central bank was accountable for 65 months of elevated inflation. He stressed that price stability does not emerge automatically and that it is the Federal Reserve’s responsibility to achieve it, while emphasizing that the 2 percent target is fixed rather than a figure that can be abandoned when the cost of reaching it becomes high. The significance of Warsh’s position lies not only in acknowledging that the problem persists, but also in redefining the standard by which success should be judged after a period in which financial markets appeared to have grown accustomed to inflation remaining above target as long as the economy continued to expand and unemployment did not rise sharply.
Yet the responsibility Warsh assigned to the central bank is complicated by another issue: the timing of interest-rate policy and the limits of what higher rates can achieve. At its July meeting, the Federal Reserve kept its policy rate within a range of 3.50 percent to 3.75 percent, despite calls from three members of the Federal Open Market Committee for a quarter-point increase. The split reflects a deeper disagreement over how much additional pressure the economy can withstand. The United States is not dealing with inflation alone. It is also confronting high government borrowing costs, sensitive bond markets, housing and financing costs that are weighing on consumers, and the need for companies to raise enormous amounts of capital to finance the current wave of investment in technology and artificial intelligence. Every additional rate increase therefore carries economic and financial costs that extend well beyond simply reducing consumer spending.
Even so, Warsh’s Jackson Hole speech on August 28 brought the possibility of another rate increase back to the forefront after he said the Federal Reserve would have more work to do if it was not convinced that inflation was moving clearly and quickly enough toward 2 percent. Markets reacted rapidly. The probability of a September rate increase rose from around 35 percent before the speech to approximately 57 percent afterward, while the yield on two-year U.S. Treasury notes also climbed. The reaction reflected a growing belief among investors that the central bank may be forced to return to tightening after months of hesitation. It also showed that the question is no longer whether the Fed is technically capable of raising rates, but how much economic cost it is prepared to accept in order to restore the credibility of its inflation target.
Assigning full responsibility to monetary policy, however, overlooks the changing nature of the price pressures the United States has faced in recent years. Interest rates can reduce demand for homes, cars, credit and investment, but they cannot produce oil, reopen trade routes, end wars, remove tariffs or expand factory capacity. Part of the renewed inflationary pressure during 2026 came amid higher energy prices linked to conflict in the Middle East, alongside new tariffs that raised the cost of some imports, while consumer spending and broader economic activity remained relatively strong. The result was a combination of demand-driven inflation and cost-push inflation that is difficult to address with a single instrument.
This exposes one of the contradictions in U.S. economic policy. The central bank is trying to restrain demand by keeping the cost of money high, while trade and fiscal policies can simultaneously generate new upward pressure on prices. When tariffs on imports increase, part of the additional cost is passed on to businesses and consumers. When energy prices rise because of geopolitical tensions, transportation, production and service costs also rise. Under such conditions, higher interest rates can weaken economic activity without addressing the original source of the price increase. From this perspective, the inflation problem does not appear to be the result of a single mistake that can be corrected with a single decision, but rather the product of an interaction between monetary policy, trade policy, geopolitics and the structure of the U.S. economy itself.
A second paradox is that the economy has not weakened to a degree consistent with the prolonged period of monetary tightening. Data have continued to show resilient consumer spending and business investment, with investment linked to artificial intelligence playing an increasingly important role. Estimates have also pointed to growth of around 3 percent in the third quarter of 2026 after an expansion of 1.5 percent in the second quarter. Strong economic activity provides protection for the labor market and businesses, but it also makes the task of reducing inflation more complicated. An economy that continues to generate income, investment and demand can withstand high interest rates for longer, while simultaneously retaining some upward pressure on prices. The experience of recent years can therefore be interpreted as an attempt to slow inflation without pushing the economy into a severe recession, an effort that achieved part of its objective but prolonged the path back to 2 percent.
In this context, Warsh introduced a different variable into the debate when he described artificial intelligence as a potentially new factor of production, pointing to growing capital flows into AI-related infrastructure and using language that compared the speed of technological development to something resembling a supercharged version of “Moore’s Law.” Historically associated with the semiconductor industry, Moore’s Law is based on the observation that the number of transistors in integrated circuits can approximately double every two years with only a limited increase in cost, a process that has made computing power greater and cheaper over time and helped build the modern digital economy.
The economic significance of this comparison extends far beyond the semiconductor industry, because one of the sustainable ways to reduce inflationary pressure is not to suppress demand but to increase the economy’s productive capacity. If artificial intelligence can increase worker and corporate productivity while reducing the time and cost required to produce goods and services, the economy may become capable of growing faster without generating the same degree of inflation. Such a path would differ fundamentally from relying almost entirely on interest rates. But that outcome is far from guaranteed. Building data centers, power networks, semiconductor plants and digital infrastructure initially requires enormous investment, energy, labor and equipment, potentially increasing demand before productivity gains become widespread.
The prospect of technological progress therefore does not eliminate the need for monetary policy, just as higher interest rates cannot by themselves resolve supply-side constraints. The U.S. economy is increasingly being pulled between two opposing forces. One pushes prices upward through energy costs, trade policy, strong demand and massive investment, while the other could eventually reduce production costs if the artificial intelligence boom translates into genuine productivity gains. The challenge facing the Federal Reserve is therefore more complicated than calculating an appropriate interest rate. Excessive tightening could restrict the investment needed to raise productivity, while excessive accommodation could allow inflation to settle at levels persistently above target.
Saying that the United States has completely failed to confront inflation would ignore the fact that it has managed to bring inflation down from its peak, preserve economic growth and avoid a major unemployment crisis. Yet describing the experience as a complete success would also be difficult to reconcile with the Federal Reserve’s preferred inflation measure remaining at 3.7 percent after 65 consecutive months above target. The more accurate picture is that Washington has succeeded in containing the crisis without resolving it. That partial success has come at the cost of an extended period of high interest rates, elevated borrowing costs and persistent uncertainty, without achieving full price stability.
The next phase will determine whether those years were simply part of a long road back toward 2 percent inflation or whether they revealed a deeper shift in the structure of the economy that makes the target harder to achieve on a sustainable basis than it was in previous decades. If energy prices and trade pressures ease while productivity rises, the Federal Reserve may be able to reach its target without resorting to severe tightening. If inflation remains close to current levels despite high interest rates, however, the United States may have to accept greater economic costs or reconsider the broader mix of policies it uses to confront rising prices.
The U.S. experience cannot be reduced to a decision over whether to raise or cut interest rates, because the inflation battle has become as closely linked to energy, trade, productivity, debt, investment and technology as it is to the central bank. After more than five years above target, the United States does not appear to be facing a collapse of its economic policy so much as the limits of a model that has long relied on interest rates as the primary instrument for restoring price stability, at a time when the economy is changing faster than traditional policy tools can keep pace with it.
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