Hey, Chairman Warsh: What’s the Rush?

It’s almost a certainty that the Federal Reserve will raise interest rates on Wednesday.

While a single quarter-point rate hike or even a couple before the end of the year is unlikely to derail the economy, there’s no pressing need for higher interest rates right now. The Fed could afford to wait—and probably should.

In some ways, the Fed has backed itself into a corner. Several Fed officials have given support to a novel theory of inflation expectations in which serial supply shocks risk de-anchoring inflation expectations. The idea is that if the public gets hit with supply shocks that push up inflation enough times, it will eventually decide that this is just going to keep happening, pushing up inflation expectations and eventually actual inflation.

There are a few problems with this view. First of all, there’s no sign of it happening outside the notebooks of Fed officials and their advisers. The 10-year breakevens—a key measure of expectations—are exactly where they were back in February, prior to the war with Iran and the consequent increase in gasoline prices. While short-term consumer inflation expectations are higher than they were before the war, longer-term expectations have barely budged. Business inflation expectations, as measured by the Atlanta Fed, are benign.