No, Fed Chairman Kevin Warsh is not the monetary version of Amy Coney Barrett

Federal Reserve Chairman Kevin Warsh raised interest rates 25 basis points to the 4 percent range, and a number of people, even on the right, had a cow. Warsh was the monetary version of Amy Coney Barrett, saying one thing at confirmation and going with the crowd when was time to play ball, wrecking the economy just in time for midterms.

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It’s just not true.

The populist-right errantly did that, though, effectively calling Warsh a RINO and a traitor.

We may like them for many things, but understanding economics is not one of them.

Meanwhile, the market types, who are no friends of the populists, were also disgruntled, saying Warsh was too harsh.

I’m not so sure even Goldman is right. The chart below shows that the core CPI, minus the volatile food and energy components, is still fifty percent above the 2 percent inflation target at 3 percent, and 2 percent inflation is the Fed’s goal.

Still others claimed that Warsh was barking up the wrong tree, raising rates in response to rising oil prices derived from the Iran military action, which he really can’t do a thing about.

A related criticism about oil was: ‘you don’t raise interest rates during an oil shock,’ or you will crash the economy.

It’s all nonsense.

The rate hikes had nothing to do with oil prices, other than through the possibility of an extended conflict ramping up government spending as Warsh’s rationale (below) indicated.

What Warsh was watching was the monetary system, the money printing, was there too much money in the system which is where we get inflation from, true inflation, not easily fixable oil price spikes, and if so, would Fed rate hikes suck some of that excess money of the system?

That’s what rate hikes are for. Cash goes from circulation to savings, including bonds, when rates are hiked, taking dollar bills out of the system, which then kills off inflation.

According to the Wall Street Journal:

Since he became Fed chairman in May, Warsh has vowed to corral inflation that has run above the Fed’s 2% target for more than five years. The Fed held rates steady at the first two policy meetings Warsh steered, in June and July. On Wednesday, however, he said the latest data showed the Fed it could wait no longer.

“This summer’s inflation readings do not tell me that underlying trends have meaningfully improved,” Warsh said. He noted that in the latest data, “too many categories are still posting increases above 3%, on both a six- and 12-month basis.”

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That was what an earlier Fed chairman, Paul Volcker, had to do to create the Reagan economy, converting it from the Jimmy Carter stagflation era to the Reagan boom; he hiked and hiked with ferocity given the problems, which did cause economic pain in the early ’80s. Then, with the Reagan tax cuts passed by a cooperative Congress, the economy bounced back faster than anyone expected, and we got … the ’80s. 

Warsh did the right thing, because in the post-Biden era, there’s still too much money in the system, and with a less than cooperative Congress under President Trump, the government is still expanding, which is why we get money printing. This indeed is the doing of a bad Congress that can’t stop spending, not President Trump, who has cut government personnel rather impressively in a bid to reduce the size of government and implemented DOGE.

Reuters has a good chart from July showing that the money supply is growing again because Congress can’t stop spending.

So, Congress is the one to blame, not Trump, and now they get what they get. 

Warsh’s hike was completely consistent with his long-held, Milton Friedman-consistent principles that inflation is always and everywhere a monetary phenomenon. The CPI minus the volatile food and energy component shows 3 percent inflation in the money supply. That’s too much. The target is 2 percent. The Fed has one job, and it’s been underperforming for years.

About a year ago, a top economist told me that the previous Fed didn’t pay attention to money supply anymore, which was shocking to hear; he said they paid attention to DEI and other non-monetary indicators pleasing to the left, and the result was the Joe Biden economy, with decrepit Joe out there pointing the bony finger at lowly gas station owners for the phenomenon of inflation, taking all eyes off the true problem which was runaway government spending.

Economist Larry Kudlow, who’s solid on economics and first made his mark at the Office of Management and Budget during the Reagan administration, has additional things the Fed can do to help the economy along:

The market seemed to know that hiking rates what what Warsh needed to do, which was why the Chicago Mercantile Exchange had priced in a 92 percent chance of a rate hike.

My theory is that they knew Warsh and his thinking, and that he acted exactly as he said he would, both to President Trump ahead of his confirmation, and in his recent speeches.

President Trump initially didn’t take the news of the rate hike well, given that rate hikes slow the economy down and make home prices more expensive, a legitimate concern ahead of midterms. 

But President Trump, to his credit, is coming around.

If you want to go ‘Paul Volcker’ and wring the inflation of Joe Biden and all his COVID spendathons out of the system, the Reagan story has taught us it’s best to start that stuff early so the tax cuts can kick in and the economy can soar. Trump didn’t have that luxury, and has done as good a job as possible to cut government and taxes that he can, and it’s to his credit that he got the hard stuff started.

He got a good guy in Warsh. The Fed is now attacking inflation at its roots, not playing around with woke chimeras. It is going to be tough perhaps, but not as tough as Volcker’s era, and for the economy, it’s going to be all right.

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Image: X screenshot