On September 16, Kevin Warsh walked out of his third meeting as chair of the Federal Reserve and announced a rate hike. A quarter point, to a range of 3.75 to 4 percent, by a vote of twelve to nothing. Then a reporter asked whether the president’s threat to cut off trade unless rates came down was a test of the Fed’s independence, and he gave an answer I have been turning over for a week.
“Part of the independence of the Federal Reserve is we stay in our lane,” he said. “Independence is a two-way street. We’ll let people that do trade policy and fiscal policy stay in their lane too.”
In July, I bet he wouldn’t do this. In The Cure Is a Boom I wrote that Warsh understood this inflation was a shortage, and that a man who understood it would refuse to jack rates into it. I even put my name on the hinge: “if Warsh drives the funds rate meaningfully higher through 2027 rather than holding it, I have misread him.” One hike and a projection for another is halfway to meaningfully higher. I was surprised. I am still a little surprised.
So I went back through everything this publication has predicted and checked it against what happened.
Why check at all
In a 1960 lecture, Karl Popper proposed that the question worth asking about knowledge is “How can we hope to detect and eliminate error?” His answer was to criticize the guesses of others, and, harder, “if we can train ourselves to do so,” to criticize our own. That is the whole reason to write down a bet with a hinge on it. It lets you find out.
Learn.
The standard I used was direction. Did the call point the right way, and did the mechanism explain what actually happened? Eight essays had calls I could check.
The short version: the calls about structure held, and the calls about what powerful people would do missed.
China did fail the exam I set it in The Tab. Iran collected its tolls in yuan, China-linked tankers were still turning around in August, and Beijing offered statements. Europe’s rearmament lagged the crisis, as I said it would. Its 38-nation mission to the Strait of Hormuz was written to begin operating only “in a permissive environment” and never entered the water. American natural gas stayed around a tenth the price of Asia’s and Europe’s while oil spiked. The tariff bill landed on American buyers. Measles came back, as I wrote in December it would, and by July this year’s count had passed all of last year’s, which was itself the highest since 1991. The local veto on data centers kept winning, by more than I knew.
Now the misses. In The Tab I wrote that “the man who lit the match declined the invitation to discuss the fire,” and I built the back half of the essay on America leaving the strait to Europe and China to figure out. (We were clearly the chaos monkey.) Within four days the United States was running the ceasefire, then a blockade, then the June deal that briefly reopened the strait, then the July strikes when that deal collapsed. It stayed out of Europe’s coalition. It never left the strait, which is what I thought might follow. I was predicting abdication by our TACO-in-chiefer.
Josef Joffe has a book on this exact habit. American decline, he argues, is a genre, a prophecy made in five waves over five decades and wrong each time, and the arithmetic is always “linear, tomorrow-will-be-like-yesterday projections.” He also gives himself an out I should borrow: “Just because Declinists have always been wrong does not guarantee that they will never be right.” Fair. The back half of The Tab drifted toward that story, and it is the story this publication’s own charter tells us to distrust. The charter is the short list of positions I wrote down to keep this project honest, and one line in it reads: declinism is a choice, not a forecast.
The Warsh call and the Hormuz call miss the same way. In both I watched the visible and missed where the power actually moved. America’s empty chair at Europe’s table told me little about what it would do in the strait. Warsh’s diagnosis told me little about his decision as a leader.
The diagnosis was right
Here is the part that stings. The Cure Is a Boom had the inflation right. I wrote that the shortage left behind by the last cycle “is not a money problem, and it does not answer to the price of money.” The August numbers say exactly that. Headline inflation ran 3.4 percent. Core, which strips out food and energy, ran 2.4. Energy was up 16.3 percent on the year, gasoline 27.4. The gap between those two inflation numbers is the war.
Warsh said so himself, at the same press conference: “We cannot affect any individual price, whether it be oil prices, whether it be food stuffs at the grocery store. But what we can do, and will do, is ensure that any change in relative prices don’t broaden out.” I see an open invitation in those words.
Do your part, and I’ll do mine.
So I had the diagnosis and then made the Fed chair the hinge anyway. Most of us make the same mistake every time prices rise.
I still think Warsh didn’t want to do it, but found himself forced. The Fed has run above its target for five years and spent the first of them calling it transitory. A new chair inherits that record. I think he hiked to buy credibility, to show the market and the public that inflation still has a cost, and to move the psychology before it moves the power. I understand the move. I don’t think it will tame this inflation, because this inflation isn’t coming from the place his lever reaches. At least not without pain the electorate is not prepared to support, on any side.
Where the bill goes
The Fed has one real tool, and it works on demand. Point it at a supply problem and the bill moves onto someone else.
Follow it. In February, American and Israeli strikes hit Iran. Iran closed the strait. Oil went through the roof and gasoline followed. That fed headline inflation, and headline inflation after five years above target is a credibility problem for the Fed. So the Fed hiked. The ten-year Treasury touched 5 percent the week of the hike, and the thirty-year mortgage sat at 6.95 percent. Multifamily housing starts fell 21.7 percent in August.
A decision made in the Situation Room is being paid on a thirty-year-old’s mortgage.
This is also where my two essays turn out to be one story. The executive decision I examined in The Tab is the inflation I asked Warsh to absorb in The Cure Is a Boom.
Both of them
The White House chose the war and the tariffs, and those are the 2026 shocks. They land on top of a fiscal tab that three administrations and two presidents ran up, and people can’t seem to hold both parties at fault at once. The ledger is not close to one-sided.
Trump, first term. The 2017 tax cut, about $1.9 trillion in added deficits over ten years, passed into an economy already at full employment. Then the 2020 emergency packages, roughly 15 percent of GDP together, passed with votes from both parties.
Biden. The American Rescue Plan, $1.9 trillion, about 8 percent of GDP, spent into a recovery that was already under way. The San Francisco Fed estimated that pandemic-era transfers from both administrations may have added about three points to inflation by the end of 2021.
Trump, second term. The 2025 reconciliation bill, the largest ten-year deficit increase of the three in dollars, about $3.4 trillion before interest. And a war.
The deficit now runs around 6 percent of GDP, a level Janet Yellen pointed out in January has never been reached outside wars and recessions. Every one of these was a choice to borrow when the economy didn’t need the help, and every administration made it. Warsh’s lane line cuts both ways. He won’t tell Congress how to spend. Asked at the same press conference whether debt was part of why long rates were climbing, he didn’t answer. The people who wrote the bill don’t want to be named, and the one who has to collect on it won’t name them.
Popper, in the same lecture, wanted to replace “who should rule?” with “How can we organize our political institutions so that bad or incompetent rulers (whom we should try not to get, but whom we so easily might get all the same) cannot do too much damage?” An independent central bank is one of those designs. It stops a president from printing his way to reelection. It was never built to absorb every other lever’s mistakes, and when we ask it to, the damage goes to whoever borrows next.
What I’m doing
When prices rise, ask who made the price before you ask who will fix it. The Fed is the address everyone knows. It is too often the wrong one in living memory.
Write down what you think, and go back to it now and then. You might be amazed by what you learn, and by the cognitive dissonance.
Sources and Inspiration
Conjectures and Refutations - Karl Popper (”On the Sources of Knowledge and of Ignorance”)
The Myth of America’s Decline - Josef Joffe