{"id":492994,"date":"2026-05-19T20:53:32","date_gmt":"2026-05-19T20:53:32","guid":{"rendered":"https:\/\/www.europesays.com\/ie\/492994\/"},"modified":"2026-05-19T20:53:32","modified_gmt":"2026-05-19T20:53:32","slug":"forget-tariffs-and-the-iran-oil-shock-a-top-economist-says-the-fed-is-blind-to-the-real-inflation-threat","status":"publish","type":"post","link":"https:\/\/www.europesays.com\/ie\/492994\/","title":{"rendered":"Forget tariffs and the Iran oil shock\u2014a top economist says the Fed is blind to the real inflation threat"},"content":{"rendered":"\n

The distressing inflation data just released<\/a> raises the crucial question on whether all the good things we\u2019re seeing in the economy\u2014from a confident, big spending consumer to the roaring stock market to an explosion in capex for AI\u2014can keep driving ahead. Is the surge in prices, and big rise in bond yields it\u2019s triggered, really a temporary trend caused chiefly by the Iran war oil shock and the lingering pressure from the Trump tariffs?<\/p>\n

That\u2019s the relatively optimistic stance just-exiting Fed Chairman Jerome Powell\u2019s been taking. But a top monetary economist believes that Powell totally misread the signals, and that if the Central Bank doesn\u2019t act fast, we could see a near-repeat of the inflationary scourge of 2021 and 2022. \u201cPowell\u2019s been saying the same thing he said then,\u201d says William Luther, an associate professor at Florida Atlantic University. \u201cHe\u2019s blaming everything on \u2018transitory\u2019 forces again, without using that word, just like he blamed inflation back then on supply chain disruptions. They weren\u2019t the main problem then, and the tariffs and higher oil prices aren\u2019t the chief culprit now. Even if those problems recede and nothing else changes, we won\u2019t solve the inflation issue. The Fed needs to address the root cause. And that\u2019s huge excess spending in the overall economy.\u201d<\/p>\n

Indeed, the recent numbers show a sharp shift from modest progress to a relapse towards the danger zone. Unveiled on May 12, the Labor Department\u2019s Consumer Price Index report showed inflation rising a huge 0.6% in April, continuing a major uptrend that started with March\u2019s reading of 0.9%. Those numbers are double to triple the average rise of 2.7% from December to February. Over the past 12 months, the index has leapt 3.8%, at almost twice the Federal Reserve\u2019s 2.0% target. The following day, the Producer Price Index release suggested worse to come: The numbers companies are paying for raw materials and inputs surged 1.4% in April, three times the forecast and seven fold the reading from December.<\/p>\n

For Luther, the real dynamic behind the recent spike couldn\u2019t be more basic: The overall dollars America\u2019s paying for goods and services is rising a lot faster than the quantities of cars, appliances, or hotel rooms we\u2019re producing and supplying. \u201cThere\u2019s a grain of truth in the tariffs and oil price argument,\u201d he says. \u201cBut those price increases mainly take money away from what\u2019s spent on other things, and don\u2019t have a major impact on overall inflation. The fundamental problem is that more money is chasing the same number of goods. We have an aggregate demand issue, not a supply disruption issue.\u201d<\/p>\n

Luther explains that \u201caggregate demand\u201d or \u201ctotal spending\u201d comprises all domestic expenditures by consumers, government, and businesses for everything from plants to inventories. So where is all this excess money coming from? A major source is a ramp in government spending: the CBO forecasts that federal outlays will rise a lofty 6% in FY 2026 (ended in September). An obvious contributor, also cited by Powell, is the king\u2019s ransom being lavished on AI data centers, projected to reach almost $1 trillion this year, multiples of the number three years ago. To boot, consumers\u2014especially the well-to-do\u2014continue to spend big time on everything from dining out to health and wellness. The \u201cwealth effect\u201d from a stock market led by an S&P that\u2019s gained 28% in the past year also likely emboldens folks to reach deeper into their wallets.<\/p>\n

The data confirms Luther\u2019s position. In the four quarters ended in March, GDP rose 2.66% on an annualized basis. As a reminder, that metric for national income measures the physical volumes of goods and services produced. But what about the trajectory of money available for pursuing what\u2019s for sale in the supermarkets and auto lots? Total spending, or aggregate demand, rose at a jackrabbit 6%. That\u2019s 3.34 points faster than output, and translates into inflation, pretty much matching the CPI numbers. And the just-released data suggests that the wave of excess money is waxing fast and unless checked, will put more upward pressure on those tabs at the checkout counter.<\/p>\n

Luther charges that the Fed is passively loosening monetary policy, and needs to fashion a strategy that tames total spending <\/p>\n

Luther points to a perverse result of Powell\u2019s view that as during post-COVID period, it\u2019s passing disruptions that account for the spikes. From October to December of last year, the Fed reduced its benchmark rate by half a point, from a range of 4.00% to 4.25%, to 3.50% to 3.75%. It hasn\u2019t changed since. But since the start of January, the CPI\u2019s gone from 2.6% to 3.8%, and the expected yearly inflation rate on the 5-year Treasury looking forward has increased by 0.42%. That inflation component explains the entire increase in what the 5-year is paying. What\u2019s known as the \u201creal rate\u201d has actually fallen. \u201cAnd it\u2019s the real rate that influences economic decisions,\u201d says Luther. Lower real rates encourage consumers and businesses to spend more, driving up prices, says Luther. The upshot \u201cis that the Fed is actually loosening policy in the face of higher inflation. Just via math, when the Fed Funds rate stays the same, and inflation expectations rise by nearly 50 basis points, the real rate falls by 50 basis points, effectively creating an easier-money regime.\u201d<\/p>\n

\u201cThis a monetary policy failure going back to 2021,\u201d declares Luther. \u201cIn the last couple of meetings, Powell kept saying that these transitory supply shocks will work themselves out. He didn\u2019t comment on the actual principal source, the surge in overall spending.\u201d The Fed\u2019s primary responsibility, says Luther, is to keep that \u201caggregate demand\u201d side steady, and instead, the Central Bank\u2019s allowed it to run rampant. The things the Fed claims are causing inflation wouldn\u2019t be sending the CPI higher had the Fed used its power over aggregate demand to combat them, Luther argues. \u201cThe Fed can see the increases in Federal spending from a mile away,\u201d he says. \u201cIt\u2019s the same with the trends in consumers spending. The Fed should project what Congress and households are going to do, and conduct policy accordingly, focusing on the necessary adjustments in overall spending needed offset places where it can see that spending\u2019s going to rise.\u201d<\/p>\n

Luther\u2019s not advocating a sudden increase in the Fed Funds rate. He believes the shift to sound strategy starts with communications, specifically, explaining the potential threats ahead, and that if they persist, what the Fed will do to overcome them. \u201cPowell should have said that we\u2019re seeing a big uptick in total spending, and we\u2019re watching it and will respond to it,\u201d Luther avows. \u201cThe communication has to be the opposite of the \u2018no view on spending\u2019 position we\u2019ve seen.\u201d He argues that suggesting inflation will abate when the war ends and oil starts flowing freely again fuels expectations that monetary policy will remain loose, and fails to address the spending problem.<\/p>\n

Hence, in Luther\u2019s toolkit, the first step is correctly identifying and explaining the real problem. \u201cThe Fed\u2019s hung up on supply shocks,\u201d he says. \u201cThe Fed first need to acknowledge what\u2019s wrong in order to craft a good response. Once you recognize you have a spending problem, you have work to do.\u201d What actions should the central bank take? The Fed should shift from passively loosening to effectively tightening via its statements about its future course. \u201cThe Fed should change its stated outlook towards a path to tightening,\u201d says Luther. In his view, the Fed must explain that even if the war ends soon or tariffs aren\u2019t ratcheted up any further, if it sees that factors such as the capex explosion and excess consumer spending persist, it won\u2019t hesitate to tighten.<\/p>\n

As always, Luther explains, the Fed has several options available to tackle the overall Big Spend. It can raise the Fed Funds rate, making borrowing more costly and curbing the lending that fuels expenditures as varied as auto purchases and new plant construction. Lifting the interest rates paid for deposits that banks park at the Fed would entice lenders to divert dollars from checking and savings accounts to the Central Bank, curbing the loan portfolios that fuel expenditures across the economy. Or, the Fed could embrace quantitative tightening, where it sells mortgages and Treasuries from its balance sheet, soaking up funds that would otherwise get spent.<\/p>\n

On the plus side, Luther is cautiously optimistic that Kevin Warsh, who replaced Powell as Fed Chair on May 15,<\/a> will steer a substantially better course than his predecessor\u2014by in part making it a top priority keep aggregate demand on a steady course. \u201cHe\u2019s a great pick,\u201d says Luther. \u201cHe has great knowledge of financial markets, and it\u2019s hard to imagine that inflation would have gotten as high under his leadership as it did under Powell\u2019s.\u201d Luther notes that Warsh has advocated shrinking the Fed\u2019s oversized balance sheet, a move that would move money in the right direction, from consumption to investment\u2013\u2013though he adds that the new Chair hasn\u2019t specified how big the purchases would be, or how fast they\u2019d come.<\/p>\n

A potential spoiler, he adds, is Powell\u2019s continued service on the Fed\u2019s Board of Governors. \u201cHe says he\u2019ll keep a low profile,\u201d Luther warns, \u201cbut the deference to Powell won\u2019t disappear. It\u2019s reasonable to think he\u2019ll have a bigger than average voice in setting policy on the Open Market Committee.\u201d<\/p>\n

It should worry all consumers and investors that so far, the return of Big Inflation\u2019s gotten the same response from the Fed as did during the early in 2021. As Luther argues, the Central Bank needs a radically different strategy this time. Kevin Warsh has all the right credentials to prove just the change agent whose time has come.<\/p>\n

This story was originally featured on Fortune.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"The distressing inflation data just released raises the crucial question on whether all the good things we\u2019re seeing…\n","protected":false},"author":2,"featured_media":492995,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","_share_on_mastodon":"0"},"categories":[174],"tags":[215007,79,632,179,18,629,19,17,5129,215006],"class_list":["post-492994","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-aggregate-demand","tag-business","tag-central-bank","tag-economy","tag-eire","tag-fed","tag-ie","tag-ireland","tag-jerome-powell","tag-william-luther"],"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@ie\/116603230984170547","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/posts\/492994","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/comments?post=492994"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/posts\/492994\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/media\/492995"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/media?parent=492994"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/categories?post=492994"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/tags?post=492994"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}