Why this former contender for the Fed chair job thinks Kevin Warsh has a huge problem on his hands

Former recent Federal Reserve chair contender and BlackRock chief investment officer of fixed income Rick Rieder thinks the guy who ultimately got the gig — Kevin Warsh — has one big challenge on his hands.

That is, a rate hike won't necessarily bring down the cost of things for households.

"What is difficult concerning inflation today, based on the San Francisco Fed's analysis, is that the cyclical parts of inflation are generally well behaved, yet it is the acyclical parts of inflation that are difficult to contain, and tend to resist movements in interest rates," Rieder wrote in a new note. "Clearly, energy, insurance, healthcare, and education are facing and passing through higher costs today. The Fed's challenge is combating that with their toolkit."

"Yet, moving the interest rate today to a marginally more restrictive rate is the Fed's directive toward addressing the fact that inflation is too high relative to target," Rieder added, "and inaction would not be the preferred route going forward."

"I don't actually think a Fed hike is going to necessarily solve the problem," Robinhood Markets chief investment officer Stephanie Guild said on Yahoo Finance's Opening Bid. "While the market can certainly absorb 25 basis points or, you know, the 50 basis points that it's pricing in for this year, I don't actually think that to me is putting a solution to a different problem."

Guild explained, "I think what we have here is we have high demand for money, and we have a high need for energy. But the supply of it is waning. … So you have these things that fuel the economy. They're kind of causing a lot of friction now. And I'm not sure a rate hike is actually going to solve that.

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"Clearly, energy, insurance, healthcare, and education are facing and passing through higher costs today. The Fed's challenge is combating that with their toolkit."

COntinuing the LIE of the FED, that inflation surges and interest rates tamp it down. It's a lie repeated ad infinitem by those in the system.

Truth be told, a dollar is a unit of debt. In a fiat system such as we have, there MUST be an ever increasing amount of debt, that is dollars, to function. That's also why we have 'Fractional Reserve Banking'. For M2 to significantly go down (ie, paying back the debt), would be systemic destruction.

Inflation ***IS*** theft. For anyone FED-connected to say their target is 2% inflation, is effectively admitting that they want to "limit" their theft to 2% of your wealth. Any higher than 2%, is merely their arms "twisting" behind their backs, while they say "ooops" I guess I'll be stealing more than 2% of your wealth for awhile.

The source of inflation is money printing, and since the money printers get first dibs in spending the new money, they always have an inherent advantage to spending the new money when it is worth more, while the money in our pockets is diluted away.

Another way to see this is to imagine a world way back before money, and the first dollar is printed, and loaned out - after all, it is by definition debt - at 10% interest. THe borrower uses the $1, and must pay back $1.10. However, one can see that cannot happen until the second $1 is printed, of which 90 cents is left, and 10 cents is used for the interest on the first dollar. Then the borrower of the second dollar is in trouble, with 90 cents remaining, being short 20 cents to pay back. Multiply this by 100 years and by trillions, and that's how we got to today.

It is an induced condition caused by the duration of this war and will get worse. For months business has absorbed the price of fuel. They have also maintained low inventories of fuel. After all, who wants tanks full of high cost fuel when they are told this is a short “little excursion” and prices will “fall like a rock”? They can only absorb higher prices for a few supply cycles and must then raise prices or add a surcharge hoping it will be temporary. A friend runs a business that consumes 10,000 gallons of diesel a month. He just told !e today he can’t continue without raising prices.

The supply and refining structure for petroleum and products has been significantly changed now in ways simply opening the Straight o Hormuz or the Red Sea will not quickly fix. Plant has been damaged or destroyed, supply and even consumption patterns have changed and storage buffers have been depleted to unacceptable levels; all of this must be repaired and restocked. I expect it will take something like two years to see things to return to January ‘26 conditions and that is from the day the repairs can begin. I’ fill my diesel tank now because I do not expect much better prices before I need the fuel. We will see some relief as supply and transportation unsnarl but that will come slowly and not back to January ‘26. I will not be surprised to see oil settle around $80, not $65. $5 diesel will look good.

Covid also created a huge knock-on price increase in real estate with the cost of everything related going up and then one more and one more thing after that. An over stimulated economy and panic buying, irrational buying gave us that and it will not go away; it is a structural change well baked in now. Same for tariffs, they can only be absorbed for so long before the real impact is seen in the accounts and they are finally passed on to the consumer.

This is all very similar to the created shortages in energy of the 70s. Higher interest rates just made the movement of money harder and stalled the economy but they did not change prices or inflation. Inflation only slowed to a trot after a headlong gallop after most of the structural price changes had been made to accommodate the new cost of petroleum.

A lot of us lived it, no time to reflect Then but we but knew what was happening. The cost of virtually everything ratched up to a new level in a new economy. High interest rates didn’t change much but to slow things and reign back the gallop so the inevitable price adjustments could be made and settle in.

13% was a great mortgage, I had one. 20% zero coupon bonds were great too as were 15% GICs. I had both of those too. Hopefully we won’t see that crazy again but if we do I’m loading up on all I can get my hands on.

The economy has never responded well to sustained price shock of any kind. Short term the economy is resilient and has enough slack to absorb blows but change too much too fast or for too long and we get in trouble and the FED probably can’t do much about it.

Your example is, of course, spot on. There can only be more money backed by vapor.

If you suggest the FED has done nothing to contain inflation we agree. The FED has only cooled the pace of inflation and only for a time. What is more, the inflated prices remain. A lot of inflation is rooted in ever more worthless currency but not all of it. Some is just too little of one thing and too much of another. The FED REALLY IS A LIE ISN’T IT?

You see the number of Youtube videos saying,”What happened in the 70s?”. Before then we hardly spoke of inflation. For various reasons of reserves I have never fully understood, Nixon, with the wave of his hand changed the gold standard. Quickly on the heels of that move came the power of OPEC and petroleum price shocks.

It is all too complex with too many levers for my poor brain to grasp in one bite. I can only visualize a chess board 1, 2, maybe 3 moves in advance, how I wish. My experience though, perishable and soon to be lost, is that economies are a house of cards built on trust in guile and deception, an agreement to accept a marker of nothing for labor and tangible goods. I sometimes wish I had been educated in it to understand it better maybe to my advantage. In spite of that I did OK and can probably finish out the race.

I sometimes wish I had been educated in it to understand it better maybe to my advantage...

Rest assured, a study in university macro economics would put you in even a worse situation, education-wise.

OTOH, reading up right now from the Austrian school of economics, Mises Institute, Murray Rothbard, etc, will put you on a supercharger to real economic Truths.

Why Is Your Country At War And What Happens To You After The War - Charles A Lindbergh (the father of the Aviator)

Eustace Mullins - The Secrets of the Federal Reserve

The Creature From Jekyll Island

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