New Federal Reserve Chair Kevin Warsh is being advised to proceed with caution regarding interest rate hikes, even as global economic anxieties, including those related to geopolitical events, grow. A commentary suggests that hiking rates at this juncture would be a significant misstep, particularly as the world emerges from a pandemic and faces persistent inflation fears.
Central bankers worldwide are reportedly concerned about inflation, with some pointing to factors such as high oil prices, the build-out of AI data centers, and the lingering effects of U.S. tariffs as potential drivers of price increases. There is also apprehension that expectations of higher inflation could, in turn, contribute to its realization. However, the argument is made that these same central bankers may have contributed to the current inflationary environment through earlier monetary policies.
Reports indicate that global money markets have already priced in a quarter-point Federal Reserve rate hike by September, with similar expectations for the European Central Bank and the Bank of England. The commentary posits that high oil prices alone do not ignite sustained inflation but rather lead to substitution, where consumers reduce spending on non-essential goods as fuel prices rise. Evidence cited includes the U.S. Consumer Price Index (CPI) inflation, which, after an increase, subsequently slowed as energy prices declined. Excluding energy costs, core CPI growth in June reportedly remained close to levels seen earlier in the year, suggesting that inflation is not far from the Federal Reserve's target.
While geopolitical developments, such as President Trump's foreign policy actions, have contributed to oil price volatility, the price of Brent crude has fallen from its peak. The commentary suggests that the rally in oil prices is likely to reverse, similar to previous forecasts.
According to the analysis, the significant inflation surge of 2022 was not primarily driven by oil but by a substantial increase in the money supply by central banks in 2020 and 2021. This expansion, it is argued, diluted the value of currency. Citing Nobel laureate Milton Friedman's long-held economic principle, the argument is that inflation is consistently linked to an excess of money relative to goods and services. The current growth rate of the U.S. M4 money supply is presented as being near its historical average and far below the peak levels seen in mid-2020.
The author of the commentary, identified as Ken Fisher, founder and executive chairman of Fisher Investments, notes that minor rate increases are unlikely to significantly harm GDP or stock markets. Interest rate adjustments influence lending through the yield curve, the difference between short-term and long-term interest rates. A steep yield curve, where long-term rates exceed short-term rates, typically encourages lending and economic growth. Conversely, an inverted yield curve, where short-term rates are higher, is often seen as a recessionary signal.
Data from the U.S. yield curve is presented as currently being in a favorable range, suggesting a positive outlook for growth. Similarly, the U.K.'s yield curve has shown improvement. Europe's yield curve, while narrowing slightly, is not yet considered a cause for concern. However, the warning is issued that aggressive rate hikes could lead to flatter or inverted yield curves globally, potentially stifling lending and causing declines in economic activity and stock markets. Therefore, the advice to Warsh and the Federal Reserve is to exercise restraint in monetary tightening.