The Federal Reserve, led by new Chairman Kevin Warsh, is under pressure to act against the high cost of living. However, the Fed’s inflation-fighting tools are limited when it comes to combating the supply-driven inflation America is facing now.

Supply-Driven Inflation

The current inflation is different from the post-Covid inflation. It is not as severe, with inflation hovering at about 3.5%, above the 2% target but a far cry from the 9.1% inflation of mid-2022. The economy is not overheating with demand, and hiring is weak. Wage growth has cooled, barely keeping up with prices.

The war with Iran has derailed the flow of energy from the Middle East, lifting prices on diesel, gasoline, and jet fuel. High tariffs have also driven up the cost of some goods. Monetary policy experts argue that the Fed should not respond to supply shocks, as it could lead to unacceptable unemployment costs.

Limitations of Monetary Policy

Former Fed Chair Janet Yellen argued that the Fed should ‘look through supply shocks’ instead of raising rates. Economists say that inflation expectations are not near the danger zone, and rate hikes won’t keep the bombs from dropping. The Fed’s decision is just a day away, with the market pricing in a 38% chance of a hike and a 62% chance of no change.

The suspense is driven in part by Warsh’s refusal to telegraph what the Fed is likely to do. Warsh has argued that forward guidance is unhelpful, handcuffing officials to forecasts that often fail to become reality.

Original reporting: KEYT (Ventura/Santa Barbara) — read the source article.