The Case Against Tightening in September
Three members of the Federal Open Market Committee expressed support for a rate increase during July's meeting, yet the panel ultimately kept the federal funds target range at 3.5% to 3.75% in a 9-to-3 vote. Major Wall Street banks including Bank of America, Deutsche Bank, and J.P. Morgan are all forecasting a September hike. On the other side of the Atlantic, the European Central Bank moved 25 basis points higher in June and is widely expected to follow suit in September as well.
Daniel Lacalle, a prominent macro strategist, contends that proceeding with additional tightening at that juncture would represent a fundamental misdiagnosis of the problem. His central argument is straightforward: neither the U.S. nor the euro area is experiencing an overheated economy driven by private credit booms or runaway money creation. Rather, the persistent price pressures stem from a temporary imported energy shock compounded by sovereign fiscal imbalances. Raising policy rates, in his view, will not address either root cause and will instead penalize the very households and small businesses that did not generate the inflation.
Growth and Labor Data Tell a Different Story
The macroeconomic backdrop on both sides of the Atlantic, as Lacalle sees it, is far from the red-hot conditions that typically justify aggressive monetary policy. In the United States, annualized GDP growth slowed to 1.5% in the second quarter, down from 2.1% in the first. Federal government spending has remained essentially flat, and nonfarm payrolls actually declined by 23,000 in July. Annual job creation is running below the economy's potential capacity, a picture that is difficult to reconcile with the narrative of an overheating labor market.
The European situation, he argues, is considerably weaker. Euro area GDP posted a 0.4% quarterly increase in Q2, but that headline figure was substantially inflated by Ireland's 3.9% surge. Stripping out Ireland, growth was a mere 0.3%. Using the Irish modified domestic demand indicator—a measure the ECB itself regards as closer to underlying real activity—euro area growth was just 0.1% in the second quarter. Eurosystem projections published in June 2026 estimate growth at 0.1% for Q3 and 0.2% for Q4 of that year. Germany, France, and Italy each recorded 0.2% growth following a 0.2% contraction in the first quarter. The Eurosystem's full-year 2026 projection stands at a dismal 0.8%, while the European Commission's forecast of 0.9% has already been revised downward. Unemployment in the bloc sits at 6.3%, with 11.1 million people out of work according to Eurostat.
Credit and Money Supply Show No Private-Sector Excess
Lacalle points to lending data as decisive evidence against the overheating thesis. In the United States, the commercial and industrial loan growth rate has decelerated sharply: 15.8% annualized in April, 10.8% in May, 4.0% in June, and a contraction of 1.1% in July, as reported by the Federal Reserve. In the euro area, the ECB's July bank lending survey indicates that credit standards have tightened for firms perceived as higher risk, with the automotive sector and energy-intensive manufacturing hit hardest, while household loan demand has also fallen. In other words, credit conditions are already tightening organically without the need for additional central bank intervention.
The ECB's own monetary statistics, released that week, further undermine the case for tightening. Broad money M3 expanded 3.4% year on year in July, up marginally from 3.3% in June, with a three-month average of 3.2%. M1 actually decelerated to 3.1% from 3.5%. Given that real GDP is growing roughly 1.0% annually and the deflator sits near 3%, money supply growth is running at or below the pace of nominal GDP. Adjusted loans to households rose 3.1% and to non-financial corporations 4.4%—figures Lacalle characterizes as normalization after years of credit stagnation rather than excess. Notably, bank claims on euro area governments declined by 0.5%.
In the United States, M2 reached $23.22 trillion in July, up 5.4% year on year per FRED data. However, Lacalle notes this figure remains below the historic trend observed during growth episodes. More importantly, the source of that growth is not a private lending boom. The H.8 data reveal it is a byproduct of the reserve regime accommodating massive Treasury issuance. The Fed's balance sheet still carries approximately $6.7 trillion in Reserve Bank credit, bank reserves stand at $2.94 trillion, and the overnight reverse repo facility has been drained to under $1 billion. The FOMC has explicitly stated it is "continuing its policy of maintaining ample reserves in the banking system." In Lacalle's framing, the only excess money in the system resides in the public sector, not the private one. Consumer spending, meanwhile, decelerated in July and has flatlined in real terms against inflation.
Inflation Is Imported, and Rate Hikes Cannot Fix It
U.S. headline CPI eased to 3.4% in July, with core inflation at 2.5%, while energy prices jumped 14.7% over the trailing twelve months. Euro area inflation stood at 2.9% in July, but the breakdown reveals the true driver: energy contributed 10.0%, the index excluding energy was 2.2%, food, alcohol, and tobacco were 1.2%, and non-energy industrial goods registered just 0.9%, according to Eurostat. Both central banks attribute the price spike to the Middle East conflict.
Lacalle's position is that no policy rate has ever produced a barrel of oil or a cubic meter of natural gas. Higher rates cannot make energy cheaper; they can only suppress demand for everything else. Mortgage holders and small businesses would bear the cost of offsetting a temporary, imported cost shock they did not create. Moreover, oil prices have already begun correcting over the past several weeks, meaning a September hike would arrive just as the energy premium is fading.
The Asymmetric Burden Falls on the Private Sector
What Lacalle identifies as the most critical flaw in the current policy framework is the asymmetry of the adjustment. Monetary tightening is being imposed on families and small firms while every mechanism that shields sovereign solvency remains fully intact. The ECB keeps its Transmission Protection Instrument available to intervene in government bond markets, and Eurosystem excess liquidity still stands at €2.1 trillion. The Fed maintains ample reserves and a balance sheet nearly three times its pre-2008 size relative to GDP. Sovereign risk spreads remain artificially compressed, meaning no government faces genuine market discipline.
In this environment, governments simply absorb rate hikes by shifting costs onto taxpayers and continuing to spend. The entire burden of monetary tightening therefore lands on the private sector—the very segment that keeps the economy productive. No government cuts spending because rates rise; higher debt service translates into heavier taxation of the private sector rather than fiscal restraint. The result, Lacalle warns, is a double punishment: costlier or unavailable credit paired with increased taxes, all with zero impact on energy prices.
What Genuine Inflation Control Would Require
Lacalle concludes that if the Fed and the ECB truly intend to bring inflation under control, the appropriate levers are different from the one being pulled. He calls for ending the implicit subsidy of government borrowing, shrinking balance sheets at a faster pace, draining reserves and excess liquidity, and removing the sovereign backstops that allow fiscal dominance to persist. Instead, the adjustment is being dumped on the households and businesses that create jobs and wealth. A September hike, in his assessment, would amount to tightening for the productive economy while simultaneously enabling reckless spending by the state—a textbook monumental mistake.