Federal Reserve Chairman Kevin Warsh has said that “trends matter most.” Wednesday’s quarter-point rate increase tests that standard. What trend tipped the decision now? August consumer inflation was 3.4% overall, while inflation excluding food and energy was 2.4%. Energy rose 16.3% over the year, and gasoline 27.4%. Gasoline alone produced more than one-third of the monthly consumer price index increase. That is a real problem, but a snapshot does not explain the policy choice.
The direction of travel is more revealing. Monthly headline inflation accelerated to 0.4% from 0.1%, largely because of energy, while annual core CPI eased from 2.5% to 2.4%. Supercore inflation is not one fixed official measure. The Bureau of Labor Statistics reported services excluding rent of shelter up 3.1% over the year, while all items excluding food, shelter, and energy rose 2.0%. Both increased 0.3% in August. This is an energy rebound layered over moderating core inflation and sticky services. It supports vigilance but does not make a rate increase self-explanatory.
Warsh offered a serious rationale. He said inflation has run above target for more than five years and is “too high and has been for too long.” He estimated core personal consumption expenditure inflation at 3.2% and said that too many categories were rising above 3% over six- and 12-month periods. But a five-year history is context, not a new forward-looking trigger. What measures of inflation breadth, expectations, or productivity-adjusted wage pressures have worsened since July? Without those answers, the Fed risks looking backward at realized prices rather than forward at their causes.
I assess growth through the progression from capital investment to productivity, hiring, and sustained expansion. Warsh said investment is robust and productivity growth strong. BLS data show nonfarm business productivity rose 2.2% over the past year while unit labor costs increased only 1.4%. Since the end of 2019, productivity has advanced at a 2.1% annual rate, compared with 1.5% in the prior cycle. Manufacturing productivity rose at a 2.4% annual rate last quarter while unit labor costs declined 0.3%.
Productivity expands supply, lowers cost pressure per unit of output, supports real wages, and allows demand to grow with less inflation. The Fed should not treat economic strength only as room to tighten. Investment and productivity can raise the economy’s noninflationary speed limit. Raising the cost of capital may slow the capacity growth that helps tame prices. The question is whether demand is outrunning an expanding supply side, not whether growth is strong.
Diesel tells the other side of the story. Refineries operated at 96.8% of capacity last week, yet distillate inventories remained 13% below their five-year average. Interest rates cannot manufacture diesel or expand refinery capacity. Higher gasoline and diesel costs are already squeezing household purchasing power and small-business margins. An additional credit squeeze is unnecessary unless the Fed can demonstrate that the energy shock is spreading into expectations, wages, and broader inflation. Otherwise, Main Street pays twice: first for energy, then for credit.
On Main Street, monetary policy arrives through monthly bills and loan renewals. Working families already paying more for fuel and freight now face more expensive cards, auto loans, and mortgages. A small firm renewing a credit line cannot issue bonds or easily hedge costs. Money diverted to interest is unavailable for wages, hiring, inventory, or equipment. Capital access is labor policy because financing determines whether an employer adds capacity and another person gets a paycheck.
KEVIN WARSH SAID ‘TRENDS MATTER MOST.’ WE’RE WAITING FOR PROOF
The Fed should make that test forward-looking. Its dashboard should show three- and six-month inflation breadth, expectations, productivity-adjusted wage growth, small-business and community-bank credit conditions, capital-goods orders, and energy inventories. It should explain what would trigger an increase, pause, or reversal. Strong institutions ask better questions before making bigger decisions. Analysis quality matters more than decision speed.
Now, is this the same old Fed reacting through the rearview mirror? If so, President Ronald Reagan’s famous line fits: “There you go again.” But one decision cannot settle that question. Warsh can answer it by showing which leading indicators changed, how productivity enters the forecast, and why higher rates address the cause of today’s inflation. Price stability is essential, especially for families with little room in their budgets. But durable stability comes from disciplined demand and expanding supply. Main Street needs a Fed that sees both, follows the trends, and applies a consistent standard before the consequences reach payrolls, families, and investment.
Dan Varroney is an economic strategist, founder and CEO of Potomac Core, and author of Rethinking Economic Growth.