Fed's Inflation Fight May Be a Case of 'Rate Hikes Won't Keep the Bombs from Dropping'

The Federal Reserve is under pressure to act on inflation, but its tools may be limited in combatting supply-driven price hikes. Kevin Warsh, the new Fed chairman, has vowed to bring inflation back to 2%, and some investors suspect a rate hike as soon as Wednesday.

However, economists argue that raising rates won't address the underlying issues driving inflation, such as the war with Iran and high tariffs. Mark Zandi, chief economist at Moody's Analytics, says 'monetary policy 101' dictates that when there is a supply shock, don't respond. Follow the script, it's worked pretty well.'

Zandi warns that raising rates could tip over the stock market, which could take down the job market. Janet Yellen, former Fed Chair, agrees, arguing that 'monetary policy cannot tame supply-driven inflation without exacting unacceptable unemployment costs'. She suggests looking through supply shocks instead of being tempted into rate hikes.

Economists estimate that about 0.66 percentage points of forecasted inflation at the end of this year will be due to the Iran war, and another 0.17 percentage points comes from tariffs and trade restrictions.