Why Kevin Warsh should think twice about hiking interest rates even as anxiety over the Iran war grows
Memo to new Federal Reserve boss Kevin Warsh: Don’t believe the hype – we’re not coming out of a pandemic anymore.And hiking interest rates now would be a major mistake. The white-hot global inflation surge of 2022 clearly traumatized central bankers worldwide, and now they’re seeing boogeymen everywhere.
They think high oil prices risk pumping all prices higher.They think AI data center buildouts and long-ago-priced US tariffs could similarly boost inflation.
They think people expecting hotter inflation can make it a reality. The thing is, it’s these same central bankers who caused the mess in the first place (more on that below).All too often, these economists don’t think too well.
It’s stinkin’ thinkin’, actually.But these are the things they think.Hence the rate-hike talk to counter “inflation pressures”.
Warsh recently pledged “no tolerance” for elevated inflation.The European Central Bank has already hiked – a mistake (though a small one so far).
President Trump’s Iran war vacillations trigger further inflation fears.Global money markets have priced in a quarter-point Fed rate hike by September.
Same for the ECB and Bank of England.As I wrote in May, high oil prices alone never spark true inflation.Instead, they drive substitution – reducing prices of non-essential goods (see the recent downturn in luxury handbags) while fuel prices climb.Proof? US consumer price index (CPI) inflation climbed from 2.4% versus a year earlier in January to a high of 4.2% in May – igniting Fed rate hike speculation.
Many pundits predicted another inflation June uptick – yet CPI growth slowed to 3.5% year-on-year as energy prices plunged.Oil fully drove inflation’s uptick and recent easing.Excluding energy, June’s CPI was 2.7% versus a year ago – basically matching January’s 2.6% – not far off the Fed’s goal.
Europe’s and the UK’s inflation parallels this.Oil didn’t bleed elsewhere.Yes, Trump’s geopolitical gyratio...