The Fed was burned once by dismissing disruption as temporary
At the intersection of geopolitical turbulence, technological transformation, and trade policy, the Federal Reserve finds itself pulled between a president demanding relief and an economy demanding restraint. The committee Kevin Warsh now chairs emerged from its June meeting with a unanimous vote that concealed a quiet but consequential divide: some members see inflation as a passing storm, while others see it as a settling climate. With tariffs expanding, oil prices climbing again, and the artificial intelligence boom deepening its cost pressures, the forces shaping prices show little sign of yielding — and the Fed, having once misjudged a temporary disruption as permanent calm, is unlikely to err in that direction again.
- Inflation has accelerated since the June meeting, with the Fed's preferred price measure rising to 4.1 percent — well above the two percent target the committee is sworn to defend.
- All three engines of price pressure are running hotter: new tariff regimes are being constructed, Middle East conflict has pushed oil back above eighty dollars after a brief ceasefire collapsed, and AI infrastructure costs are intensifying rather than easing.
- A hawkish faction within the committee believes rates must rise above the current 3.5–3.75 percent range, putting them on a collision course with a president who appointed the new chair specifically expecting deep cuts.
- Warsh's own theory — that AI will eventually unleash a disinflationary productivity wave — remains a bet on a future that has not yet arrived, while the costs of building toward that future are very much present.
- The Fed, the White House, and the markets are converging on a moment of reckoning: the economic data is pointing toward tightening, and no amount of political pressure changes what the numbers say.
The Federal Reserve's June meeting ended with a unanimous vote to hold rates steady, but the agreement was thinner than it appeared. Behind the surface consensus, the nineteen voting members were divided between those who expected rates to remain near 3.5 to 3.75 percent through year's end and a hawkish faction convinced that containing inflation would require pushing rates higher. The fault line runs through a single question: are the forces driving prices up temporary, or are they becoming permanent features of the economic landscape?
Since June, the evidence has tilted toward permanence. The Fed's preferred inflation gauge rose to 4.1 percent in May, and core inflation climbed to 3.4 percent. More telling is the behavior of the three forces the committee identified as the primary drivers: tariffs, war, and the AI boom. Trump has continued expanding his tariff agenda, constructing a new global trade regime after the Supreme Court struck down the previous one. A ceasefire that had briefly calmed Middle East tensions — and brought oil down to around seventy dollars a barrel — collapsed this week, sending crude back above eighty. And the artificial intelligence buildout is accelerating, with semiconductor demand, data center construction, and electricity consumption all intensifying, even as AI providers raise prices to shore up their economics.
These are not isolated pressures. Higher oil flows into transport costs, which flow into goods prices broadly. The Fed, having once dismissed pandemic-era supply disruptions as fleeting, is not inclined to repeat that mistake. The longer these forces persist, the more deeply they embed themselves in the economy's price structure.
The sharpest irony belongs to Kevin Warsh, Trump's chosen chair. Before his appointment, Warsh argued that AI would eventually prove a powerful disinflationary force, justifying preemptive rate cuts. But that productivity dividend lies somewhere in the future, while the costs of building toward it — in capital, labor, and infrastructure — are accumulating now. The extraordinary demand for funding to build AI systems is itself a source of upward pressure on interest rates, working directly against the case for cuts.
Trump appointed Warsh expecting accommodation. The economy, shaped in part by Trump's own policies, appears to be delivering the opposite.
The Federal Reserve's policy committee walked out of its June meeting with a surface appearance of unity that masked deeper fractures about where interest rates should go. Kevin Warsh, the new chairman appointed by Donald Trump, presided over a committee that unanimously agreed to hold rates steady and strip away language suggesting future cuts. But the minutes told a different story: the nineteen voting members were split between those who expected rates to stay near their current 3.5 to 3.75 percent range by year's end, and a more hawkish faction convinced that rates would need to rise above that level to contain inflation.
The division hinges on a simple question: Are the forces pushing prices higher temporary, or are they here to stay? The committee considered two scenarios. In the first, inflation from Trump's tariffs, the Middle East war, and the artificial intelligence spending boom would fade, allowing the Fed to eventually lower rates. In the second scenario, with the labor market stable but inflation persistent, "almost all" committee members believed the Fed would need to tighten policy—to raise rates—if it wanted to bring inflation back down to its two percent target.
Since that June meeting, the economic picture has shifted toward the second scenario. The Fed's preferred inflation measure, the personal consumption expenditures index, rose from 3.8 percent to 4.1 percent in May. Core inflation, which strips out volatile food and energy, climbed to 3.4 percent. More importantly, none of the three forces driving inflation have weakened. Trump continues announcing new tariffs and is constructing a new global tariff regime to replace one struck down by the Supreme Court. The Middle East war, which had briefly paused under a ceasefire that allowed oil prices to fall to around seventy dollars a barrel, has erupted again this week, pushing crude back above eighty dollars. And the artificial intelligence boom is intensifying, with competition for semiconductors, data center construction, and electricity demand all accelerating, while AI tool providers are raising prices as they struggle to improve their economics.
These cost pressures are not abstract. They ripple through supply chains. Higher oil prices eventually show up at the petrol pump, then feed into transport costs, then into the price of goods generally. The Fed, burned once by dismissing pandemic-era supply chain disruptions as temporary, is unlikely to make that mistake again. The longer tariffs, war, and AI-driven costs persist, the more they will embed themselves into the broader economy.
There is one counterargument, and it comes from Warsh himself. Before taking the Fed chair, he argued that artificial intelligence would eventually unleash a productivity wave so powerful that it would act as a "significant disinflationary force," allowing the Fed to cut rates without risking runaway inflation. He wanted the Fed to cut rates proactively in anticipation of that productivity surge. But this argument rests on two uncertain bets. First, before any productivity gains materialize, there will be years of substantial AI-driven cost pressures as companies absorb the expense of acquiring AI tools and reorganizing their workforces. Second, the degree to which AI will actually reduce costs and improve productivity—and the timeframe in which it will do so—may be overstated.
There is also the matter of capital. The extraordinary demand for funding to build AI infrastructure has created a new and expanding source of competition for capital, which by itself puts upward pressure on interest rates. That dynamic works against the case for rate cuts.
The irony is sharp. Trump appointed Warsh because he believed the new chairman would deliver the large rate cuts he has repeatedly demanded. But the economic forces now in play—the very tariffs Trump is imposing, the war he declared "over" only to see it resume, and the AI boom he has championed—are pointing toward the opposite outcome. The hawkish members of the committee, those expecting rates to rise, appear more likely to be proven right. That will not be what the president wants to hear.
Notable Quotes
Almost all committee members believed some policy firming would probably be required if inflation remained elevated due to tariffs, war, and AI spending.— Federal Reserve FOMC minutes, June 2026
Warsh previously argued AI would act as a significant disinflationary force, enabling rate cuts without risking inflation breakout.— Kevin Warsh, before becoming Fed chair
The Hearth Conversation Another angle on the story
So the Fed's committee is split, but you're saying the hawks will win. What makes you confident about that?
The three big inflation drivers haven't gone away. Tariffs are expanding, not shrinking. The Middle East war just restarted. And AI spending is accelerating. The Fed has to respond to what's actually happening, not what it hopes will happen.
But Warsh—Trump's guy—he believes AI will eventually make everything cheaper. Doesn't that matter?
It matters for his worldview, but not for the next two or three years. Before any productivity gains show up, companies are paying enormous sums just to access AI tools and rebuild their operations around them. That's inflationary pressure happening now.
So Trump gets a chairman he thought would cut rates, and instead gets rate increases?
That's the bind. Trump created the tariff environment and the geopolitical instability that's driving inflation. Warsh can't cut rates into that without losing credibility on price stability.
What's the real risk if the Fed doesn't raise rates?
Inflation embeds itself deeper into the economy. You see it first at the pump, then in transport costs, then everywhere. The Fed learned that lesson painfully during the pandemic.
And if they do raise rates?
It slows growth, makes borrowing more expensive, and directly contradicts what the president is demanding. But it's what the data is telling them to do.