Warsh's Inflation Fight: A Case of 'Doing Nothing' Might Be the Best Option

US Federal Reserve Chair Kevin Warsh recently called for the Fed to receive a broader range of ideas on monetary policy, acknowledging that current models are flawed.

Warsh's hardline stance on inflation is at odds with his own model, which fails to account for the impact of AI on productivity and growth.

The traditional 'production function' model assumes that advancing technology always enhances economic growth, but this is not accurate. In reality, new technologies can disrupt entire industries and render previously valuable goods obsolete.

Warsh's emphasis on inflation control through interest rates is also misguided. Raising interest rates would actually pump money into financial assets and boost economic activity in services sectors.

The current federal debt is four times larger relative to GDP than it was in the early 1980s, making it even more difficult for Warsh to achieve his goal of reining in inflation through traditional means.