Fed will hike as inflation persists at 4.2%, former Trump economist says

The Fed will raise interest rates after inflation accelerated to 4.2% in May, its highest in three years, Joe Lavorgna, SMBC Americas chief economist and former counselor to Treasury Secretary Bessent, said on CNBC.

"It's just a matter of time before the Fed hikes," Lavorgna said on "Fast Money." "The inflation data is not cooperating, and the central bank's current policy stance is increasingly inconsistent with price pressures that are accelerating, not moderating."

Consumer prices rose 4.2 percent year-over-year in May, the fastest pace since mid-2023 and well above the Fed's 2 percent target. The reading follows a period where markets had priced in rate cuts for 2026, bets that have now largely evaporated. A Reuters poll of economists showed the Fed holding rates through the year as inflation persists, with cut calls fading.

A rate hike would mark a dramatic reversal from the easing cycle markets had anticipated. The fed funds rate currently stands at 4.25 percent to 4.5 percent after the central bank cut by 100 basis points through 2025. If the Fed tightens instead, it would pressure risk assets from equities to credit, potentially pushing the 10-year Treasury yield higher and strengthening the dollar against major peers.

The last time inflation ran above 4 percent for consecutive months was in early 2023, when the Fed was still in its tightening cycle. At that time, the S&P 500 fell about 7 percent over a two-month span as the fed funds rate peaked at 5.25 percent to 5.5 percent. Today's setup mirrors that period in some respects, though the economy has since shown greater resilience to higher borrowing costs.

Inflation's Reach Broadens

The May CPI report showed price pressures extending beyond sticky categories. Core inflation, which excludes food and energy, rose at an annual rate that also exceeded forecasts, according to the data. Services costs, particularly shelter and medical care, contributed the largest share of the monthly increase, while goods prices stabilized after months of declines.

Lavorgna's warning carries weight given his role as a former counselor to Bessent during the Trump administration, where he advised on economic policy. His view aligns with a growing minority of economists who argue the Fed's next move may be up rather than down, a scenario that seemed improbable as recently as late 2025.

The Fed's next policy meeting is scheduled for July 28-29, followed by the September 15-16 meeting. Markets will scrutinize the central bank's statement and Chair Jerome Powell's press conference for any shift in language that signals a willingness to raise rates. The last time the Fed used hawkish language comparable to what Lavorgna is now forecasting was in mid-2023, when it delivered what proved to be the final hike of that cycle.

This article is for informational purposes only and does not constitute investment advice.