Memo to new Federal Reserve boss Kevin Warsh: Don’t believe the hype – we’re not coming out of a pandemic anymore. And hiking interest rates now would be a major mistake.
The white-hot global inflation surge of 2022 clearly traumatized central bankers worldwide, and now they’re seeing boogeymen everywhere. They think high oil prices risk pumping all prices higher. They think AI data center buildouts and long-ago-priced US tariffs could similarly boost inflation. They think people expecting hotter inflation can make it a reality.
The thing is, it’s these same central bankers who caused the mess in the first place (more on that below). All too often, these economists don’t think too well. It’s stinkin’ thinkin’, actually. But these are the things they think.
Hence the rate-hike talk to counter “inflation pressures”. Warsh recently pledged “no tolerance” for elevated inflation. The European Central Bank has already hiked – a mistake (though a small one so far). President Trump’s Iran war vacillations trigger further inflation fears. Global money markets have priced in a quarter-point Fed rate hike by September. Same for the ECB and Bank of England.
As I wrote in May, high oil prices alone never spark true inflation. Instead, they drive substitution – reducing prices of non-essential goods (see the recent downturn in luxury handbags) while fuel prices climb.
Proof? US consumer price index (CPI) inflation climbed from 2.4% versus a year earlier in January to a high of 4.2% in May – igniting Fed rate hike speculation. Many pundits predicted another inflation June uptick – yet CPI growth slowed to 3.5% year-on-year as energy prices plunged.
Oil fully drove inflation’s uptick and recent easing. Excluding energy, June’s CPI was 2.7% versus a year ago – basically matching January’s 2.6% – not far off the Fed’s goal. Europe’s and the UK’s inflation parallels this. Oil didn’t bleed elsewhere.
Yes, Trump’s geopolitical gyrations fan uncertainty – part of Brent crude prices’ peak above $100 per barrel last week. But that is well below April’s $138 peak. As my March column forecasted, oil earlier fell fast to pre-war levels starting before peace talks. July’s rally will reverse similarly swiftly. Few ever get this right.
Inflation-paranoid central bankers should stop sweating inherently volatile commodity markets and start looking in the mirror. Huge 2022 inflation wasn’t due to oil. It was because central banks massively increased the money supply in 2020 and 2021, diluting its value during the COVID pandemic.
As I often like to note, Nobel laureate Milton Friedman taught 60 years ago that inflation is always about too much money chasing too few goods and services — always. US M4 money supply – the broadest measure – grew 6.9% from a year ago in May. That is near the 5.6% historical average—and far from June 2020, when it hit 30.4% from a year earlier. That was trouble – Fed-induced trouble. Today is nothing of the sort.
True, a small hike or two won’t wreck GDP or stocks. Rate moves affect lending by morphing yield curves – the gap between short and long interest rates, which I detailed last July. Banks borrow short-term money to fund long-term loans. When long rates top short, new loans are profitable. A “steep” curve fosters lending and growth. When short rates top long, the curve is inverted – a good, if imperfect, recession warning.
Starting in 2026, America’s yield curve was 0.5 percentage points. Now? A slightly better 0.8 – bullish. The UK’s climbed from 0.7 percentage points to 1.1. Also bullish. And how about rate-hiking Europe? Its current 0.8 ppt yield curve narrowed slightly since the year’s start as short-term rates rose. Not a problem … yet. Those spreads are policymakers’ wiggle room.
That said, aggressive hiking would cause global yield curves to flatten or invert – choking lending and driving global economic, GDP and stock market declines. While that isn’t happening yet, Warsh and crew should heed the lesson now: Take it easy with the tightening.
No stinkin’ thinkin’, please.
Ken Fisher is the founder and executive chairman of Fisher Investments, a four-time New York Times bestselling author, and regular columnist in 21 countries globally.
