Economic Monitor – Weekly Commentary
by Eugenio Alemán

Thoughts on inflation, interest rates and retail sales

October 16, 2026

Chief Economist Eugenio J. Alemán discusses current economic conditions.

This week was a travel week, beginning at the National Association for Business Economics (NABE) annual conference in Cleveland, Ohio, and ending in Phoenix, Arizona, for several advisor and client presentations. As you might expect, the NABE conference was dominated by discussions about AI and its potential impact on long-term economic growth.

We also heard from Cleveland Federal Reserve President Beth Hammack, who entered this year as one of the more outspokenly hawkish members of the Federal Open Market Committee. She has consistently argued for higher interest rates to stay ahead of inflationary pressures, and her remarks at the conference confirmed she remains firmly in that camp. While she acknowledged the challenges facing many households and businesses within her district, she views restrictive monetary policy as necessary.

We understand the Federal Reserve's (Fed) concerns. After all, high inflation disproportionately harms lower-income households, which have limited ability to shield themselves from rising prices. However, as we argued several weeks ago, fiscal policymakers should also bear some responsibility for moderating economic growth. Without greater assistance on that front, the Fed may be forced to tighten policy to a degree that unnecessarily increases recession risks.

The Fed currently finds itself in a difficult position. Lower- and middle-income households are often the first to be priced out of credit markets when interest rates rise, creating a double burden as they simultaneously contend with higher borrowing costs and elevated prices. The objective of higher rates is to slow demand, but demand is already soft for much of the population. In contrast, the spending power of higher-income households continues to be supported by the same factors that have driven roughly half of all consumer spending in recent years.

For these households, higher interest rates can actually provide an income boost through increased returns on interest-bearing assets. In that sense, monetary policy may be acting less as a restriction and more as a source of additional income. Combined with gains from wealth accumulation, rising interest income has helped support spending among upper-income consumers. As we noted following the Bureau of Economic Analysis revisions to the national accounts, interest income receipts were revised higher, reinforcing this dynamic. As a result, it is difficult to argue that higher-income households will materially reduce consumption simply because interest rates move higher.