Warsh Stresses Rate Hikes as Best Tool for Taming Inflation

Fed Chair Kevin Warsh has emphasized that raising interest rates is the most effective way to combat inflation, despite its drawbacks. The other alternatives, such as draining excess liquidity from the financial system or relying on an AI-fueled productivity boom, are less palatable but also less likely to succeed.

Warsh's approach may have some backing within the Federal Open Market Committee, which has been gradually expanding the Fed's balance sheet again through Treasury bill purchases. However, this move could complicate any efforts to reduce the balance sheet as a tool for tackling inflation.

Economists estimate that monetary policy works with a lag of around 9-12 months, and the transmission effects of balance sheet changes and productivity gains are even longer. Inflation remains above target, and Fed Chair Warsh will face increasing pressure to act if it continues.