The Federal Reserve faces a major decision this week: raise interest rates or hold them steady as energy prices push inflation higher.

Markets are pricing in a strong chance of a quarter-point rate hike, but PhD economist Orphe Divounguy argues the Fed should hold. His concern: the current inflation increase is being driven largely by a supply shock in energy, while the underlying economy is showing signs of weakness.

Core inflation is around 2.4%, wage growth is easing, hiring remains near a decade low and recent economic growth has been heavily concentrated in AI investment. Divounguy argues that raising interest rates can cool demand — but it cannot produce more oil or directly fix an energy supply shock.

Chris Krug and Orphe Divounguy also examine the growing divide inside the Federal Reserve, inflation expectations, the labor market and whether Chairman Kevin Warsh's hawkish comments at Jackson Hole have created a credibility problem heading into Wednesday's decision.

The key question: Is another rate hike necessary to fight inflation, or could it risk over-tightening an already fragile economy?

Everyday Economics is hosted by Chris Krug and PhD economist Orphe Divounguy and is brought to you by The Center Square.

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