Inflation Is a Choice

On May 12, 2026, the BLS reported April inflation hit 3.8%. That reading ran hotter than every forecast on Wall Street. Energy prices were driving the surge, with gasoline up over 28% and fuel oil climbing past 54%. The number the central bank wants at 2% was moving aggressively in the wrong direction. Yet looking at the stock market, you would never know there was a problem. The S&P 500 closed at a record high of 7,412. The data on the ground and the pricing on the Right in the middle of this disconnect, the institution responsible for stabilizing the United States economy is changing hands. Jerome Powell leaves the chairmanship this Friday, ending an eight-year tenure. The Senate is preparing to confirm Kevin Warsh as his successor. He is stepping into a 14-year term on the board, and his diagnosis of what the Federal Reserve has been getting wrong looks nothing like what the markets are currently pricing in. This transition at the Federal Reserve occurs at a moment of extreme volatility. The policy shift over the next 90 days will determine the exact cost of your mortgage, the yield on your savings, and the price of your groceries. This chart shows the Fed's assets ballooning from $4.2 trillion pre-pandemic to a $9 trillion peak, now at $6.6 trillion. Rolling these bonds off too fast spikes barrowing costs, but holding them indefinitely makes the central bank the permanent buyer of last resort. Warsh intends to address this tradeoff with a He argues that the Fed must take absolute, visible responsibility for the number, regardless of external shocks. Warsh steps into this specific dilemma with a strategy designed to dismantle the very expansionary policies that created the current $6.6 trillion balance sheet. To understand how this pivot works in practice, look at how the Fed handled the recent Iran-driven energy shock. Under Powell, the Fed adopted flexible average inflation targeting. This policy allowed the central bank to let inflation run above 2% for a stretch to make up for periods where it ran too low. When oil prices spiked, this flexibility allowed the Fed to dismiss the surge as a temporary supply-side issue and delay any immediate rate hikes. Warsh intends to replace that flexibility with a strict 2% mandate. Under his framework, the Fed is required to aggressively counter a 3.8% inflation print, even if the primary drivers are geopolitical energy shocks, rather than domestic demand. This approach has an intentional, direct impact on borrowing costs. Fighting a supply-side shock requires the Fed to maintain high interest rates, which keeps the 30-year fixed mortgage rate, which sat at 6.45% in mid-May, painfully elevated. For Warsh, these high rates are a statement of absolute ownership over the 2% target. He believes that by refusing to look through energy spikes, the Fed establishes the credibility necessary to control long-term prices. Standard market analysis suggests a simple relationship. If the central bank stops buying bonds, yields must go up, making mortgages and corporate debt more expensive. Warsh argues the opposite. He believes that by shrinking the Fed's balance sheet, he can actually lower long-term interest rates. He calls this problem fiscal dominance. When the Fed buys trillions in treasuries, it signals to Congress that long-term borrowing is permanently cheap. This encourages the government to run higher deficits, which requires more bond issuance. Eventually, the sheer volume of new debt overwhelms the Fed's buying, and interest rates rise despite the central bank's efforts. His proposed fix is a reverse operation twist. The Fed would sell longer-dated treasuries and buy shorter ones. This removes the Fed's support from the long end of the curve, the part that sets mortgage rates, forcing the market to face the true cost of government spending. This maneuver is designed to use the bond market as a structural tool to force Congress into a more sustainable fiscal path. Warsh's endgame involves signing a new Fed-Treasury Accord. This would formally separate the central bank's mission from the government's spending needs, ensuring the market knows the Fed is no longer on the hook for whatever Congress decides to borrow. This strategy is already meeting political resistance. The Senate Banking Committee advanced Warsh's nomination on a strictly partisan 13-to-11 vote, reflecting a deep divide over his rules-based approach to Democratic critics expressed concern that Warsh would act as a sock puppet for Donald Trump, delivering the rate cuts Trump has publicly demanded. However, Warsh's professional history suggests the opposite. He spent the last decade arguing the Fed has been too loose, even resigning from the board in 2011 to protest excessive quantitative easing. If this mechanical trade works, the removal of Fed support for long-term debt could actually stabilize the market, leading to lower 10-year yields without the Fed needing to cut its baseline interest rate. But the risk is high. If the bond market rejects the plan, the U.S. could experience a violent taper tantrum. In that scenario, mortgage rates would likely explode past the current 6.45%, causing a severe contraction in the housing market. The transition from flexible inflation targeting to a strict 2% mandate changes the fundamental math of the This is Market Truths. Clear analysis of markets, technology, and power.