I’m Defying Wall Street…

Eighty-five percent of Wall Street thinks I’m wrong. Seems like good odds to me.

Fed Chairman Kevin Warsh will step to the podium tomorrow afternoon and, like Punxsutawney Phil telling us about the future of winter every Groundhog Day, he’ll deliver the verdict on where interest rates are headed in America.

The traders who place billion-dollar bets on these announcements are telling us there is an 85% chance that the Fed raises interest rates by a quarter of a percentage point. They’re probably right…

But what if I tell you that I suspect the Fed will sit on its hands? That Warsh can actually raise interest rates… by doing nothing?

He can, in effect, have his cake and eat it too.

In this case, that means fighting inflation but without blowing up the Treasury Department, where his buddy, Treasury Secretary Scott Bessent, is trying to refinance a house that’s already on fire.

What no one seems to have realized yet is that Warsh doesn’t need to hike this week because the market has already hiked rates for him.

At his recent speech in Jackson Hole, Wyoming, Warsh publicly stated that inflation “hasn’t meaningfully improved” and that the Fed has “work to do.”

Long-term interest rates promptly started climbing to levels not seen in years—in some cases, decades.

That is real-world tightening. Real pressure on the economy because real borrowing costs have gone up.

Kevin Warsh and the Fed didn’t have to touch the interest rate lever for rates to go up… he just had to say he’s a hawk on rates, even if he’s just cosplaying.

The same game is at hand this week.

The Fed has three choices:

One: Raise rates. The bond market is probably appeased for the time being, so long-term rates will likely stay where they are—maybe even drift down a bit as the market reads a hike as the Fed getting serious about inflation.

But the Fed’s lever pulls on the short end of the bond market. And a hike drives up the cost of every short-term Treasury bill Bessent has been quietly stacking up to fund the government on the cheap. His whole strategy blows apart.

Two: Cut rates. The bond market will absolutely lose its mind.

Inflation is very real in America, and the bond market will react by driving long-term rates even higher, which will slam the US consumer and the US housing market.

Or three: Do nothing. The bond market still won’t be happy, and long-bond rates will still go up because bond traders will read the hold as the Fed quietly bending to political pressure—and they’ll demand higher yields to compensate for a central bank that just showed it can be pushed around.

But think about what that is: By definition, that’s a tightening—the cost of money is more expensive than it was a day earlier… and Warsh did not have to kill Scott Bessent’s Treasury Department, and he doesn’t have to spend political capital… because we all know that if Warsh raises rates when his boss in the Oval Office has spent the past 18 months or so calling for a rate cut, then Trump will embark on an angry tweet storm.

Here’s the deeper problem.

Why is inflation such a bugbear in America today?

It’s largely because of the impact that war has had on the US economy.

Fertilizer costs are up, for example. That flows through both farm and ranch… which flows through every supermarket aisle, the veggie business, and the meat counter.

Diesel costs are astronomical as well… they hit a record six bucks a gallon nationally and $10 in California. Farms run on diesel fuel, adding to those supermarket costs. So too does transportation. That’s more price pressures at checkout, as well as added costs for all those deliveries from Amazon and UPS and FedEx.

So your grocery bill keeps climbing while your paycheck flatlines because war-induced inflation is slamming the American economy.

Credit card delinquencies are already at record highs last seen in the 2008 crash—and a rate hike lands on that card statement inside six weeks. Voters are even more miffed going into crucial midterms elections that are already looking sketchy for Trump and the GOP.

A rate hike is supposed to cool an overheating economy. But American consumers aren’t overheating—they’re already underwater, and a rate hike just adds weight to their anchor.

Kevin Warsh and the Federal Reserve cannot fight today’s kind of inflation with a quarter-point rate hike. That’s not going to change the cost of fertilizer or the price for a gallon of diesel.

And gasoline costs are back up as oil prices push back above $100 per barrel.

That’s supply-side inflation that stems from the Strait of Hormuz closure… from Houthi rebels in Yemen attacking the Bab el-Mandeb Strait that hamstrings Saudi oil, gas, and fertilizer shipments… from Ukrainian strikes on Russian refineries that are pushing global diesel prices higher…

The Fed has precisely zero control over any of that.

It’s not going to magically reopen a shipping lane. It doesn’t convince Ukraine to stop bombing Russian diesel-fuel infrastructure. It doesn’t make the Houthis realize that their actions in the Bab el-Mandeb Strait are hurting Americans’ ability to buy affordable carrots.

Meaning, a rate hike does very little to actually address the root causes of inflation. Bessent himself said as much last week when he told CNBC that the Fed doesn’t hike into supply shocks until second- and third-order effects show up.

But standing still on rates accomplishes that same result a rate hike would.

It drives up the cost of debt at the long end without destroying Scott Bessent on the short end.

Guaranteed that Warsh knows all of this.

Warsh isn’t the villain in our story. He’s the patsy playing the hand that decades of Congresses dealt America by soaking the country in more than $40 trillion worth of debt.

There was a time when pushing interest rates higher was the answer to inflation.

But this inflation isn’t yesterday’s inflation. And this mountain of debt isn’t the mountain of debt other Treasury Secretaries have had to manage. Scott Bessent’s Treasury is making a risky call on short-term interest rates remaining relatively low. Kevin Warsh knows that his Fed now holds the hand grenade that could blow apart that strategy and force America into a borrowing binge even greater than the one we’re already in.

Warsh knows it.

Bessent knows it.

I suspect the 85% will figure it out on Wednesday afternoon.