Kevin Warsh can’t reopen the Strait of Hormuz

Key Points:

• Federal Reserve Chairman Kevin Warsh is under pressure to raise interest rates to combat inflation, but current inflation is largely driven by supply-side issues such as the war with Iran and tariffs, which rate hikes cannot directly fix.
• Inflation has eased from a peak of 9.1% in mid-2022 to about 3.5%, with weak hiring and slowed wage growth indicating demand is not overheating, contrasting with the previous inflation period driven by excessive demand.
• Economists including Mark Zandi and Janet Yellen caution against raising rates in response to supply shocks, warning that rate hikes could harm the stock and labor markets and potentially trigger a recession.
• The artificial intelligence boom is contributing to inflation by increasing demand for memory and components, a trend unlikely to be curbed by modest rate increases.
• Market expectations are divided on whether the Fed will raise rates imminently, with Warsh avoiding forward guidance, while some experts suggest inflation will gradually decline without aggressive Fed intervention, emphasizing that affordability depends more on income growth than price reductions.