Fed Chairman Warsh Caught Between Rock and Hard

Place

In the Homeric epic “Odyssey,” the hero Odysseus navigates the storms of the “wine-dark sea,”

seeking to return to his home and family after many years of war-fighting. He must first pass through a narrow strait of water, one with dangers on both sides. To the left is Scylla, a monster living in the rocky cliffs, capturing and devouring passing sailors. On the other side is Charybdis, a deadly whirlpool capable of engulfing Odysseus and his men and destroying his ship.

Federal Reserve Chairman Kevin Warsh similarly finds himself between a rock and a hard place. Like Odysseus, Warsh must navigate a narrow passage (one might imagine the Strait of Hormuz) between the hidden shoals of economic recession, on the one hand, and the draining whirlpool

of runaway inflation, on the other.

While the Fed’s June Open Market Committee determined to maintain overnight interest rates at the current 3.5 to 3.75 percent target range, Warsh adopted a hawkish tone, and half of the committee members expect to raise rates

later this year. Investors currently place two-thirds odds on at least one rate increase in 2026. 

Raising rates too much or too fast will have several serious consequences.

First, it will raise the cost of credit and borrowing for private-sector businesses at a time when few can afford it. The economy is growing, but slowly, with a lop-sided tilt toward a few hot sectors, such as artificial intelligence (AI). The estimate for first-quarter real gross domestic product (GDP) growth was just revised downward from 2.0 percent to 1.6

percent, and the consensus for the full-year 2026 growth is hovering around two percent.

Hardly a robust scenario to begin with, higher rates, like higher fuel and energy costs, will further dampen economic growth. 

Second, higher interest rates will raise the cost of borrowing for the U.S. government as it seeks to refinance its $38 trillion in national debt and raise even more debt to support continued deficit spending on the Iran War and numerous untouchable entitlement programs. Not to mention that higher rates would risk popping the bubble currently expanding in U.S. equity markets.