Kevin Warsh chairs his first Federal Open Market Committee meeting this week under conditions that would test any central banker — and that will test him in ways his predecessor never had to face.
Inflation in the United States has climbed to 4.2%, the highest in three years. Across the Atlantic, the European Central Bank has already moved, raising its benchmark rate by 25 basis points to 2.25% — the first G7 central bank to tighten in response to the inflationary pressure flowing from the Middle East conflict. In doing so, the ECB has effectively called into question what Warsh must now answer: raise, hold, or cut?
The Data Leave Little Room for Ambiguity
The inflation figures released last week stripped away whatever comfort policymakers might have taken from earlier projections. The U.S. Bureau of Labor Statistics reported that the consumer price index rose to 4.2% in May, up from 3.8% in April. Core inflation — which excludes volatile food and energy prices — climbed to 2.9%, above both the prior month's reading and the Fed's 2% target by a substantial margin.
The ECB's simultaneous decision to tighten while upgrading its inflation forecasts and downgrading its growth outlook for both this year and next amounted to an institutional declaration that stagflation is no longer a tail risk. It is the baseline.
Professional Logic and Political Reality Pull in Opposite Directions
For any central banker operating without political interference, the prescription is not complicated. With inflation running more than two percentage points above target — and running higher than the eurozone's 3.2%, which the ECB found sufficient cause to tighten — the case for a rate increase is straightforward. Holding rates while inflation accelerates is not a neutral act; it is a choice to fall further behind.
The political calculus, however, runs in the opposite direction. Donald Trump has been a consistent and vocal opponent of tight monetary policy. He spent much of his first term pressuring Jerome Powell to cut rates, and Powell's refusal became the defining friction of that relationship. After May's inflation figure was released, Trump made the puzzling claim that he "likes inflation" — a statement that resists easy interpretation but does little to obscure his preference for cheap borrowing.
The political stakes are concrete. Inflation is squeezing household finances, and Trump's approval rating has dropped below 40%. With congressional midterm elections in November, a rate hike by Warsh at his inaugural meeting would almost certainly invite a public attack from a president known for conducting monetary policy disputes loudly and in the open.
The likely outcome — holding rates steady — is what most market participants currently expect. It is a compromise between professional duty and political survival, and it fully satisfies neither.
Holding Steady Now Buys Time, Not a Solution
Even if the Fed stands pat this week, the underlying dynamics have not changed. Inflation shows no credible near-term path back to 2%, which means rate increases are not a question of if but when. Markets are already pricing in a hike at the October meeting. If inflation accelerates further, that timeline could shift to July or September.
The broader market expectation at the start of this year — that the Fed would deliver multiple rate cuts in 2025 — is now obsolete. Rate cuts this year are off the table. They may remain out of reach well into the first half of next year.
A War-Driven Inflation Surge With No Quick Exit
This inflationary episode has a clear proximate cause. As recently as February, U.S. inflation stood at 2.4%. The Middle East war that Trump launched at the end of that month drove gasoline and diesel prices up by roughly 40%, pushing the broader price level sharply higher within weeks.
Before this week's meeting, news emerged of a U.S.-Iran peace agreement — but that development warrants careful scrutiny. Trump has declared the war "about to end" on nearly 40 separate occasions, and the fighting continued each time. The current agreement is better understood as a fragile ceasefire than a durable settlement. If negotiations break down and hostilities resume, inflation will rise again.
Even a lasting peace would not quickly unwind the price pressures already embedded in the economy. War damage to Middle Eastern oil and gas infrastructure, disrupted supply chains, fertilizer-driven food price increases, and the inherent stickiness of cost increases once established — all of these factors make the idea of a rapid inflation retreat implausible. Trump's suggestion that inflation will fall sharply once the war ends reflects an optimism that the economic evidence does not support.
Stagflation Risk Is No Longer Hypothetical
The ECB's revised forecasts — higher inflation paired with weaker growth for both this year and next — describe stagflation in plain terms. The United States sits at the epicenter of this inflationary wave, with price growth running above Europe's. Whether Warsh raises rates this week or not, further tightening in the months ahead now appears unavoidable.
Taiwan Faces Limited but Real Exposure
Taiwan's domestic inflation situation remains relatively contained. The central bank projects a full-year rate of 1.9%, just below the 2% threshold, and its rate-setting board faces no immediate pressure to act at its own meeting this week.
That relative insulation should not breed complacency. A deteriorating global inflation environment carries real spillover risks. Should domestic inflation breach 2%, the central bank would face its own pressure to tighten. Rate cuts, under any foreseeable scenario, are not on the agenda.
Original Article in Chinese
