Warsh: Inflation is a Choice Caused by Central Bank Policy

Kevin Warsh, a Federal Reserve official, has been speaking about inflation in a way that sets him apart from his colleagues. According to Warsh, rising prices are not an inevitable byproduct of a strong economy.

Inflation is a choice, he believes, and it's caused by central bank policy that creates too much new money too quickly. This view is based on the monetarist theory developed by Milton Friedman in the mid-20th century.

Friedman argued that inflation requires an increase in the overall money supply that outstrips production, enabling higher prices for everything at once. Warsh agrees with this assessment and believes that there is no inescapable compromise between strong employment and stable prices.

Warsh's views on inflation differ from those of his colleagues, who often see it as a side effect of positive economic conditions. He understands interest rates correctly as the primary instrument by which the Fed influences the pace of new money creation, most of which occurs through banks lending out reserves.