The fear of a hyperinflationary explosion blowing out the U.S. and world economy as a result of Trump’s Iran war on top of his benighted tariff assault, is leading to even ardent advocates of Federal Reserve easing (lowering interest rates) to think twice about what could happen. Financial Times played up the significance, in that regard, of comments made on April 17 by Fed Governor Christopher Waller, who is widely viewed as a leading “dove” on the Fed Board of Governors, who had previously advocated for cutting interest rates, and voted for that back in January. Waller is now singing a different tune. “I believe there is the possibility that this series of price shocks may lead to a more lasting increase in inflation as we saw with the series of shocks during the pandemic,” Waller admitted in a speech in Alabama. He said that “a prolonged conflict could trigger a ‘very complicated’ stagflationary scenario, in which high inflation would couple with a weaker labor market,” FT reported. “Such a situation ‘may mean’ that the Fed would be unable to boost the economy by cutting borrowing costs from their current 3.5% to 3.75% range. Markets have largely ruled out rate cuts by the Fed this year,” the FT noted.
FT has a second article, written by George W. Bush CEA head Glenn Hubbard, who similarly states that “in the medium term, inflation continuing to run above the 2% target will limit the central bank’s room for maneuver, and also call its credibility into question. In the longer term, questions remain about the effectiveness of quantitative easing, the size of the Fed’s balance sheet, errors made in the aftermath of the Covid pandemic, and the central bank’s forays into areas better left to fiscal or regulatory policy.”
Hubbard hammers on the point: “On the perennial question of interest rates, the U.S. economy’s near-term momentum and elevated inflation are likely to tilt the balance of risks against further cuts, despite Trump’s enthusiasm for an immediate cut.”
