The Fed Can’t Fix Inflation Alone—It’s Time for Washington to Face Reality
The longer Congress pretends that inflation is purely the Fed's problem, the worse our fiscal situation will become
Just last week, Federal Reserve Chair Jerome Powell reassured Americans that inflation was under control. The markets took comfort. Yet, the very next day, the latest inflation report delivered a cold dose of reality.
The Consumer Price Index came in hotter than the prior month—again. Headline inflation hit 3% in January, while core inflation (excluding food and energy) was 3.3%. Supercore inflation—another measure that strips out housing—remained stubbornly above 4%. None of this is reassuring. Inflation has now increased for four consecutive months, and monthly CPI changes have been on an unbroken upward march since June last year.
It’s a worrying trend, and one that suggests the Fed’s confidence may be misplaced. Since the central bank began its monetary easing cycle in September—by signaling future interest rate cuts—inflation has worsened. The bond market agrees. Treasury yields have surged by 100 basis points, a clear sign that investors expect inflationary pressures to persist. The message from Wall Street is simple: Inflation isn’t going anywhere anytime soon.
The Federal Reserve made a grave miscalculation in 2021, treating inflation as a “transitory” phenomenon. This time, it risks making the opposite mistake—loosening policy too soon while the economy is still running hot. Unemployment is at 4%, real GDP growth is near 3%, and demand remains strong. Expansionary monetary policy in these conditions is bound to cause overheating. But blaming the Fed alone is too easy. The real problem lies elsewhere—one that no amount of interest-rate tinkering can solve: Fiscal Recklessness.
For all the focus on monetary policy, the bigger driver of inflation today is fiscal policy. And Washington’s approach to spending is nothing short of reckless.
The latest 10-year projections from the Congressional Budget Office (CBO) show a terrifying trajectory: Budget deficits will average more than $2 trillion per year over the coming decade. That’s only the baseline. Factor in extensions of expiring tax cuts and other political promises, and the total cumulative deficit could balloon to $25–32 trillion.
At some point, something has to give. If markets believed these deficits would eventually be financed through future tax increases or spending cuts (or both), inflation wouldn’t be a concern. But that’s not happening. Instead, inflation expectations are rising, signaling that investors do not believe serious fiscal consolidation is on the horizon. The risk? The U.S. will try to inflate its way out of debt, letting prices rise to erode its obligations.
This leaves the Fed in an impossible position. If it raises rates to combat inflation, it makes U.S. debt (and refinancing) even more expensive, worsening the fiscal outlook and, potentially, increasing the rate of inflation. If it keeps rates low, inflation continues rising, eating away at wages and savings. Either way, the Fed’s traditional tools are losing effectiveness.
The uncomfortable truth is that fiscal policy, not just monetary policy, is now a key inflation driver. And that means Congress—not just the Fed—must act.
If policymakers want to curb inflation, they need to get serious about spending restraint. That means cutting waste, reforming entitlements, and shrinking the size of government. Encouragingly, the new administration is already making progress on cutting waste through its efforts with DOGE, demonstrating a commitment to more responsible fiscal management. But more must be done.
At the same time, lawmakers considering the renewal of the Tax Cuts and Jobs Act (TCJA) should prioritize provisions that are most pro-growth. Provisions like full expensing and lower corporate rates should be made permanent, while new tax changes (i.e., no taxes on tips) that are of little-to-no economic value but come with the inherent risk of blowing up the federal deficit should be avoided.
This is the moment for Washington to confront reality. Inflation isn’t going away on its own. And the longer Congress pretends this is purely the Fed’s problem, the worse the situation will get.
The solution isn’t complicated: Stop the spending binge, prioritize tax policies that drive growth, and commit to a credible plan for fiscal consolidation.
The Fed can do its part. But until Washington steps up, inflation will remain a persistent problem—one that the U.S. can no longer afford to ignore.