First, Do No Harm
With a more humble and restrained approach, the Fed could set a much-needed example for modern policymaking.
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Financial markets are still taking the measure of the new Federal Reserve. It’s quite a change. The three rate cuts late last year had painted a reassuring, familiar picture: a Fed returning to its dovish bias, a Fed that would once again prioritize the labor market, support asset prices, and never disappoint investors.
Kevin Warsh has brought a sudden change. In his first congressional testimony this week, he emphasized that the Fed can and will bring inflation back to target — reiterating the unambiguous message of his first press conference. Warsh’s arrival at the helm of the central bank seems to have revived the spirits of the hawks on the FOMC. In a tough speech at the beginning of the week, Christopher Waller reverted to his traditional hawkish stance after an awkward dovish interlude while the race for the Fed Chair post was still open. Dallas Fed President Lorie Logan said policy interest rates should be higher.
To understand Warsh’s emphasis on inflation, take a look at the chart further down. Post Global Financial Crisis, GDP growth never dipped below 1.6% per year, not far from Fed estimates of potential growth (except for the 2020 Covid lockdowns). By contrast, inflation averaged close to 6% over 2021-23. US citizens have suffered a lot more pain from high inflation than from low growth.
Higher, eventually
With Warsh refusing to provide guidance on future policy moves, financial markets had begun to price a fair chance of a rate hike already this month, but changed their mind after the reassuring inflation data released last Tuesday: thanks to lower energy prices, June CPI dropped by 0.4%, slowing to 3.5% year-over-year (from 4.2%); excluding food and energy, prices remained flat, and core CPI inflation slowed to 2.6% y-o-y (from 2.9%).
The relief on headline inflation is likely to prove temporary: crude oil prices have rebounded as the US-Iran ceasefire ceased to prevent gunfire on the Hormuz Strait. And we don’t even need a rebound in energy prices to make a case for rate hikes: headline inflation at 3.5% means the real policy rate is about zero, so it’s hard to argue that monetary policy is in any way restrictive when unemployment is low, fiscal policy remains loose, AI investment keeps surging, stock markets keep flying high and inflation has been above target for five years. The September-December 2025 rate cuts were at best an insurance policy that proved unnecessary, and unwinding them would be wise.
Thanks to the moderate June inflation reading though, there’s no rush, and I think the Fed will stay on hold this month. The fact that core inflation remained stable, though, confirms that Warsh is right in wanting to rethink how the Fed assesses economic trends and shapes its communication and its policy — and the high quality of the experts he’s nominated to head the various task forces shows he’s serious about it.
“The biggest crisis in history”
Consider:
Last April, the International Energy Agency warned that we faced “the biggest [energy] crisis in history.” We should have expected a 1970s-style stagflation; instead US growth kept humming along just fine, with a moderate uptick in headline inflation, and even Europe and Asia, more dependent on energy imports, have managed to muddle through. Stop-gap measures like the release of oil reserves helped, but the bigger lesson is that the global economy proved a lot more resilient than expected, rerouting and redistributing supply and adjusting demand.
In an era of knee-jerk sensationalism, the Fed should (1) get a better understanding of growth and inflation dynamics, including through better data; and (2) avoid engaging in a communication game that always ends with financial markets demanding an oversized policy response. This will become more and more important as innovation keeps reshaping our economy.
The only thing we have to fear is policy itself
The related lesson is that when it comes to growth and inflation, the biggest threat comes from policy mistakes.
in our more uncertain and fast-evolving world, policymakers need to switch to a less interventionist risk management strategy.
In the immediate aftermath of the global financial crisis, monetary policy-making became dominated by a paranoid fear of deflation. Yet US CPI inflation averaged 1.6% per year between 2010 and 2016, just a bit below target. GDP growth meanwhile averaged a very respectable 2.3% per year, peaking at 2.9% in 2015, when inflation was just 0.1%.
The real trouble came with the ill-advised shutdowns of entire economies during Covid, followed by a reckless persistent expansion of fiscal and monetary policy — a combination of policy errors that wreaked more damage than most exogenous shocks.
One key conclusion stands out, in my view: in our more uncertain and fast-evolving world, policymakers need to switch to a less interventionist risk management strategy. Over and over again, market economies have demonstrated a remarkable degree of resilience and adaptability. The U.S. is a case in point, surmounting repeated shocks and defying recurrent recession fears. Market economies can self-correct with much greater speed and flexibility than governments. Policy makers should intervene less, and they should think more before they act.
“We don’t know what to do, but we must do it now!”
I am worried that the trend keeps moving in exactly the opposite direction. Emboldened by the rise of populist pressures among voters, governments want to do more. Experts often add fuel to the interventionist fire. The latest example is the “We Must Act Now“ open letter, where distinguished economists and technology leaders call for policymakers to intervene immediately to set AI on the right path. The letter stops short of indicating what policymakers should actually do, other than a vague “build the incentives, guardrails, and institutions needed to steer AI in a direction that complements humans and benefits society.” A ‘motherhood and apple pie’ call to action.
We do not yet have a good enough understanding of how AI will evolve to determine what actions might be appropriate. “We don’t know what to do, but we must do it now” is hardly a sensible recommendation, and it’s a very dangerous one when addressed to governments with a track record of heavy-handed and ill-considered interventions. We’re talking about the same policymakers that botched the pandemic response in spectacular fashion, causing major long-term damage to economies, incentives, and learning outcomes — do we really want to urge them to save us from another supposed existential threat?
First, do no harm
Monetary policy is in a good place. Inflation needs to be brought back to target, but does not seem at risk of spinning out of control. The economy is growing at a healthy pace, even if with multiple vulnerabilities and some irrational exuberance on AI investment. Fiscal policy poses a much bigger problem, as hard trade-offs on spending and taxes need to be addressed. Energy, healthcare and defense hold another set of complex challenges.
A rethinking of Fed strategy could set the example for a more humble and restrained approach to policymaking: less is more, and understanding must precede action. In this fast-evolving world, interventionist governments are their own worst enemy — and ours. First, do no harm.
Much to agree on here (and a few things we still need to discuss over the long-planned glass of wine - assuming there’ll still be governments to provide air traffic controls and safety, roads to drive on, sidewalks to walk on etc so that we can actually get together…)
As usual, I'll leave the monetary argument to others and stick to your energy passage, which is where I can add something.
You draw a reassuring lesson from the Iran shock: the IEA warned of the biggest energy crisis in history, yet the economy rerouted supply, redistributed it, and adjusted demand, so its resilience was underestimated. Two things complicate that, and a third sits inside your own argument.
First, most of what did the absorbing was not a repeatable capacity but a one-time draw on finite buffers. The IEA released 400 million barrels from emergency reserves, about four days of global consumption, which now have to be refilled over years. Oil moved through bypass pipelines that carry roughly nine million barrels a day against the twenty the strait normally handles. Spare production capacity, by definition, runs out the moment everyone pumps flat out. At the peak the near-closure removed an estimated 14 million barrels a day. The system survived a four-month disruption by spending its savings, which is why Citi was modeling $150 crude and analysts still called the market strongly undersupplied when the deal arrived. Surviving before the buffers ran dry is not the same as strength.
Second, and more consequential: for a decade, the thing that kept oil markets tight was China, and China has quietly changed sides. Between 2015 and 2024 it added close to 6 million barrels a day of demand, roughly 60% of all global oil-demand growth. That was the engine. It has now stalled and begun to reverse: Chinese oil demand fell in 2024 for the first time in twenty years. The reason is the demand you credit with adjusting so gracefully, except that much of it left the market permanently before a single tanker was turned away. By 2025 China's EV fleet alone was displacing about 1 million barrels a day, some 15% of what its road-transport oil use would otherwise have been, with electric and LNG trucks removing roughly another half-million. Worldwide, the EV fleet displaced around 1.7 million barrels a day in 2025, equal to Indonesia's entire consumption. Run the same disruption three years ago, into a market where China was still adding a million barrels a day of fresh demand and where a driver hit by a price spike had no affordable electric alternative to escape into, and the adjustment comes out of price and rationing, not substitution. The graceful demand adjustment you credit was built by the electrification you expect this war not to accelerate.
Third, your own text points the other way. You call the June inflation relief temporary precisely because crude rebounded the moment the ceasefire stopped holding the strait. But if energy prices are volatile enough to swing headline inflation and shape a rate decision, they are not also the background noise the economy simply shrugged off. Energy cannot be a first-order force and a non-event in the same piece.
The economy was more resilient than the 1970s analogies feared. But that resilience was spent reserves on one side and permanent demand flight on the other, and both are reasons to reduce oil exposure, not reasons to be reassured by it.
Your mileage may vary.