New York Federal Reserve President John Williams now says inflation has likely peaked and that monetary policy is “well positioned” to bring inflation back toward the Fed’s 2% objective. Williams acknowledged inflation remains “unquestionably too high,” but argued that the worst of the tariff effects have passed, housing inflation is moderating, oil prices have peaked, and disruptions tied to the Middle East conflict should ease over time. He forecasts inflation falling to roughly 3.25% by the end of the year and gradually returning to 2% by 2028.
This is precisely where central bankers always get it wrong. They continue assuming the geopolitical landscape will cooperate with their economic forecasts. There is absolutely no evidence supporting that assumption. If anything, the evidence points in exactly the opposite direction. The Middle East is becoming more unstable, not less. Ukraine remains a war of attrition consuming enormous military resources every day. Europe is dramatically expanding defense spending. China is eyeing Taiwan and waiting for the US to stretch itself too thin to protect it. NATO members are rebuilding their militaries at levels not seen in decades. Governments everywhere are preparing for a world of prolonged geopolitical confrontation.
Wars are the most inflationary events imaginable.
Williams argues that oil prices have peaked and that disruptions in the Middle East should gradually subside. That is an assumption, not a forecast supported by events. The ceasefire that briefly lowered energy prices has already broken down. Shipping risks remain elevated. Iran, Israel, Lebanon, Syria, and the Red Sea continue presenting risks capable of sending commodity prices sharply higher overnight. It only takes one escalation to completely invalidate months of inflation projections.
The same mistake is being made with Europe. Governments across Europe are now increasing military budgets at extraordinary rates. Germany is rebuilding its armed forces. Poland continues massive military expansion. Finland has built underground shelters capable of protecting nearly its entire population. Civil defense has returned across Europe because governments themselves are preparing for scenarios they refuse to discuss publicly. Military production does not reduce inflation. It diverts labor, capital, raw materials, and industrial capacity away from productive investment and into war preparation.
This is exactly why Keynesian economics continually fails. It treats inflation as though it exists in isolation from politics. The world economy has never functioned that way. Capital moves because of confidence. Prices move because of shortages. Governments create shortages during wars faster than central bankers can hold press conferences explaining why inflation should be falling.
I have said repeatedly that interest rates are not the master variable. Confidence is. Once governments begin financing wars with debt, inflation becomes only one symptom of a much larger sovereign debt crisis. The borrowing required to finance military expansion eventually overwhelms every textbook model economists continue relying upon.
The Federal Reserve itself admits one of the biggest drivers behind last year’s inflation was the Middle East conflict. Williams acknowledged supply disruptions tied to that war contributed significantly to rising prices. Yet he simultaneously assumes those pressures will fade while the conflict itself continues expanding. That is an extraordinary leap of faith.
The Federal Reserve may believe inflation has peaked, but our computer has consistently warned that increased worldwide conflict is coming in the near-term, and there is nothing more inflationary than war.
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