In this week’s episode, we (Gary Gensler and Simon Johnson) focus on inflation in the United States. Does the Federal Reserve have inflation under control? If not, when might we expect the Fed to tighten monetary policy through higher short-term interest rates?
Overall, the U.S. economy is close to “full employment” and inflation has been consistently above the Fed’s 2% target. We’re experiencing multiple upward pressures on prices — including the Iran war energy price shock (see Episode 27: When Will the Iran War End?), the AI capital expenditure boom, decline in net immigration, and US tariff policies.
Ordinarily, in such a situation you would expect the Fed to “lean against the wind” by raising interest rates, possibly as early as the Federal Open Market Committee’s (FOMC’s) mid-September meeting announcement (Wednesday, September 16th). At their last meeting there was a split at the FOMC, with three members willing to vote for higher rates.
During our podcast, we review Fed Chair Kevin Warsh’s important speech at Jackson Hole, on the economy and conduct of monetary policy. For many years prior to rejoining the Fed, Chair Warsh argued for tighter monetary policy. But what will the FOMC led by Warsh do now — given that the President has repeatedly called for the Fed to lower interest rates?
If not in September, would the Fed raise rates at its next meeting in late October and risk being seen as influencing the mid-term elections then just one week away? Otherwise, does it wait for its last meeting of the year in December?
Inflation and the Federal Reserve are much on the markets (and our) minds these days. For a discussion on what the bond market may be saying about inflation you can also listen to Episode 26: What Is The Bond Market Saying? For our earlier episodes on the Fed you may also wish to listen to Episode 12: Big Challenges Facing The New Fed Chair and Episode Two: The Federal Reserve and Monetary Policy. Those substack posts also include recommendations for further reading.
