Fed's Inflation Fight Complicated by War and Trade

The Federal Reserve's Chair, Kevin Warsh, was appointed with conflicting goals from President Donald Trump: lower interest rates and curb inflation. Despite his reputation as an inflation hawk, the inflation rate in August was still higher than the Fed's target of 2%, at 3.4%. This increase is largely driven by energy costs due to the ongoing Iran war.

Warsh had initially received credit from the bond market for being willing to raise interest rates if necessary to combat inflation. However, recent inflation data has been hotter than expected, with long-term interest rates reaching levels not seen since 2007 and the newly expanded trade war with Canada unlikely to help.

The Fed's ability to control inflation is limited to raising or lowering short-term interest rates, which affects borrowing costs and the supply of money in the economy. The biggest factors driving inflation appear to be Trump administration policy choices, such as tariffs and the Iran war, rather than Warsh's decisions at the Fed.

Investors are expecting a rate hike on September 16, but if they believe that inflation will remain higher for longer and interest rates will continue to climb, they may want to consider inflation-proof investments, such as stocks with strong balance sheets, commodities, or real estate investment trusts (REITs).