Will Kevin Warsh Tell The Truth About Inflation At Jackson Hole?

Tomorrow, central bankers, policymakers, economists and academics from around the world will gather for the much ballyhooed annual gathering dubbed the Jackson Hole Economic Policy Symposium. Will Fed head Kevin Warsh use the occasion to tell these pooh-bahs the truth about inflation?

There couldn’t be a more awesome backdrop than the Teton mountains to discuss various monetary issues. Unfortunately, what usually comes out of these confabs is more reminiscent of misbegotten molehills than majestic mountains.

Kevin Warsh takes center stage on Friday for a much anticipated speech. He is under attack by Federal Reserve reactionaries who don’t like the fact that their new boss wants to change the way things are done. One of their gripes is that Warsh welcomes actual debate instead of striving for North Korean-like unanimity. He also isn’t a fan of signaling what the Fed will do next, particularly concerning interest rates. As the record makes painfully clear, our central bank can no more accurately gauge the future than the rest of us. You’ll learn more from Tarot card readers than the Fed’s so-called forward guidance.

To undermine Warsh, critics have been whispering that his unwillingness to hint what the Fed might do next regarding interest rates demonstrates that he’s weak on battling inflation, that he wants to keep rates low to please President Trump.

What these acidic whisperers reveal is their own wrongheaded beliefs about inflation. To them, it’s gospel that to fight inflation you must raise interest rates to slow the economy. Many, including economists and decision-makers at the IMF, even subscribe to the notion that devaluing a currency will make a country more competitive.

This deranged dogma regarding inflation has done immense damage over the years. It has suppressed growth rates, a particularly obscene outcome for developing countries. But woe to those who might challenge this belief, despite real-world experiences. During the 1970s and early 1980s, for example, peacetime inflation reached record levels—and so did interest rates.

What central bankers and most economists can’t seem to grasp is that the very definition of inflation is lowering the value of a currency. Price changes resulting from disruptions to production by wars, natural disasters, costly regulations or pandemics don’t justify higher interest rates.

The way to cure inflation is announcing that the operating core of monetary policy is keeping the currency steady in value. Kevin Warsh should announce that in the future currency stability is the goal. The superstition that you fight inflation by jacking up the cost of money and suppressing the economy belongs in a dumpster, not in the halls of central banks and finance ministries.