Thursday, September 24, 2026

The featured image to the left is a very rough caricature of Fed Chairman Kevin Warsh, ready to fight inflation. The actual Kevin Warsh is much better looking and far more astute.  I picked the caveman to symbolize the coarse nature of the Fed’s economic policy that lacks the very specific finesse and authority required for its monetary policy to be effective – assuming that fighting inflation is really something we want the Fed to be doing.

For an economy of our size and complexity, effective economic policy design and implementation need artificial intelligence-based modeling.  The devil is in the details.  On our own, we humans just aren’t up to the task.

Personally, the twelve members of the Federal Reserve’s Open Market Committee, of which Warsh is the Chairman, are well-educated, highly sophisticated individuals who do, in fact, care a great deal about the economy they are tweaking to keep inflation under control.  As to the actions they take to fight inflation by adjusting the Federal Funds Rate that banks charge when they loan their reserves, overnight, to other banks, these Board members are conducting what amounts to primitive economic policy of questionable efficacy.

Ours is a highly complex economy.  To put it mildly, the causes of inflation are many and varied and are, for the most part, difficult to identify and manage.  President Trump’s influence on the prices we pay as a result of his tariffs and the war with Iran are unusually obvious factors over which the Fed has no control whatsoever.

To counter the harmful effects of these Trump programs and miscellaneous other causes of rising prices, the Fed just increased the cost of money paid by banks borrowing from each other.  Banks in turn will subsequently increase the rates they charge to lend money to their corporate and household clients.  The result, so the Fed believes, will be a slower growing economy, less prone to the evils of inflation.  While monetary policy of this sort may make sense theoretically, academically, the reality is that we have no idea what specifically is happening inside the economy the Fed has just poked with a quarter point increase in this specific rate.  For the Fed and the rest of us to believe that this increase is accomplishing anything, that it is doing more good than harm at material levels, is just plain ludicrous.

Okay.  Depending upon the direction, size and duration of adjustments the Fed makes to the rates it controls, the Fed can encourage or discourage demand- and/or supply-related pressures that are causing the inflation that the Fed is so worried about.  Raise the cost of money and rational investors and consumers will borrow less of it to spend on products and services.

That’s right.  You heard me correctly.  Inflation itself and raising interest rates to reduce that inflation are both demand and supply side phenomena.  Raise rates and demand (spending) will decline across the economy – and, eventually, subject to various lags, the available supplies of this and that will become less robust.  It’s not, in other words, just corporate and consumer demand that the Fed is affecting.  The Fed is tinkering with both sides of every market in specific ways the Fed can’t possibly and isn’t even trying to anticipate.  Theirs is a crude, in many ways thoughtless thing to do to an economy that they should probably leave well enough alone.

To be clear, by virtue of its inability to affect the very specific causes of inflation – tariffs and the war with Iran among them – the Fed is depressing all manner of economic activity, to everyone.  It’s gross and often counterproductive economic policy, figuratively and literally given that higher interest rates may, eventually, reduce levels of production which would have, organically, kept inflation under control on their own, without who knows what interference by the Federal Reserve. If and when the Fed’s monetary policy is effective, in all likelihood its impact is disproportionately hurtful to small businesses and to middle and lower income families.

Don’t let Trump’s obsession with controlling the Fed give you the impression that playing with Fed-controlled interest rates is a good way of managing inflation or any other elements of our economy’s behavior.  It’s influential to be sure, but not necessarily in a good way.  Right now, it’s Trump’s policies that we need to stop and reverse to make life in America more affordable.  For all we know, the Fed’s tinkering with interest rates is just making matters worse.

-Les Cohen