How much power does the Fed really have?

The latest inflation data shows the Federal Reserve is stuck fighting a problem it may not have the tools to solve. Core PCE, the Fed’s preferred inflation gauge, hit an annual rate of 3.3% in July, well above the central bank’s 2% target. But as Marketplace’s Nancy Marshall Genzer reported, the current inflation is driven by forces outside the Fed’s control: the war in Iran, disruptions in the Strait of Hormuz, commodity prices, and tariffs. Daniel D. Martino Booth of QI Research put it bluntly: “They cannot influence the war in Iran. They cannot influence what’s happening in the Strait of Hormuz. They cannot influence commodity prices, and they cannot influence prices that are driven upwards by tariffs.” The Fed’s traditional tool—raising interest rates to dampen demand—works when inflation is demand-driven. This time, it’s a supply chain problem. Olu Sonola of Fitch Ratings said the Fed can only “hope that they can talk this inflation down, they can signal this inflation down, but they also recognize that the tool they have is quite blunt.” Tulane economist Gary Hoover added that the “on again, off again nature of some of the issues that the Fed is facing leaves them really conflicted and not certain on how to proceed.”

Consumers feel the squeeze, but spending holds