{"text":[[{"start":4.76,"text":"The writer is an FT contributing editor and director of economic policy studies at the American Enterprise Institute"}],[{"start":14.96,"text":"Since taking office in May, Federal Reserve chair Kevin Warsh has said all the right things when it comes to the Fed’s failure — spanning over five years — to bring inflation back to its 2 per cent target. This week, the rate-setting committee backed up those words by increasing its policy interest rate by a quarter point to a range of 3.75 to 4 per cent. The Warsh Fed is off to a strong start."}],[{"start":39.26,"text":"Warsh and his colleagues voted unanimously to increase the federal funds rate — the first increase since July 2023, when the central bank aggressively raised rates in its delayed response to the 2021 inflation surge. Moreover, the committee indicated that more increases are coming. Of the 18 Fed officials who submitted forecasts, 16 expect at least one additional quarter-point increase in 2026."}],[{"start":65.1,"text":"Just seven weeks ago, the committee voted against a rate hike. The August data seems to have had a surprisingly large impact on the Fed’s inflation outlook because, for some, it offered additional support for the view that disinflation had set in over the summer. But Warsh was absolutely right in his Jackson Hole speech to caution against relying “on isolated data points”. “Trends matter most,” he argued. And the inflation trends are troubling."}],[{"start":91.58,"text":"As measured by the core personal consumption expenditures price index, inflation has been trending upward for more than a year. In July 2025, by this measure, inflation was 2.9 per cent. In July 2026, the most recent month data are available, inflation was 3.3 per cent."}],[{"start":109.62,"text":"Of course, some of this is due to factors that higher interest rates will not affect, like tariffs and pass-through from higher energy prices from the war in Iran. But the measure of inflation I prefer does not include goods (which are affected by tariffs) or energy prices. It also shows an upward trend in inflation for more than a year."}],[{"start":127.74,"text":"I share Warsh’s broader economic outlook. The unemployment rate was lower in August 2026 than it was in August 2025 or August 2024. Although long yields on government debt have been increasing, overall financial conditions do not appear to be restrictive. Underlying economic growth is healthy. The Federal Reserve Bank of Atlanta currently forecasts annualised current-quarter GDP growth of 5.1 per cent."}],[{"start":154.86,"text":"How high, then, do rates need to go? It is instructive to consider the first half of 2025, when the effective funds rate was at roughly 4.3 per cent — evidently not high enough to generate disinflation, to cause a worrying softening in the labour market, to prevent economic growth from accelerating or to restrain an increase in stock prices. This week, the Warsh Fed undid one of the three mistaken 2025 rate cuts. I expect an additional rate increase this year will be needed."}],[{"start":183.58,"text":"The chair’s post-meeting press conference highlighted two fundamental questions. Warsh characterised the Fed’s decision as removing “a dose of accommodation”. This implies that he is using a long-established monetary policy framework — that there is a level of the funds rate below which the Fed is supporting economic demand and above which it is restraining demand."}],[{"start":203.86,"text":"But in the press conference, Warsh rejected that framework, dismissing it as an interesting academic exercise with no “operational effect on decisions” the Fed makes. He will need to explain how he will calibrate the funds rate in the absence of this."}],[{"start":218.02,"text":"Second, Warsh argued that he does not believe there is a trade-off between stable inflation and full employment. In the short term, this view has major implications for monetary policy. If disinflation does not come from increasing economic slack, then does Warsh think it is entirely driven by inflation expectations? If short-term demand can be increased without inflation, then does he think that inflation in 2021 was largely unaffected by that year’s massive fiscal stimulus?"}],[{"start":244.98,"text":"Still, Warsh has shown that he has steel in his spine by increasing interest rates seven weeks before the midterm elections. Central bank independence is crucial for price stability, which in turn is crucial for long-term prosperity. Donald Trump is the greatest threat to Fed independence in modern history, going so far as to weaponise the criminal justice system against Fed officials in order to bend the committee to his desire for lower interest rates."}],[{"start":270.5,"text":"Warsh is now steward of this vitally important foundation of prosperity. Some Republicans, including the president, may absurdly assign partial blame for any coming midterm losses to the Fed’s decision, making the hard job of protecting its independence all the more challenging. Warsh has shown he is up to the job."}],[{"start":295.54,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1789694408_3829.mp3"}