The Fed's inflation reckoning deja vu

• Fed chair nominee Kevin Warsh has signaled that he wants to tear down the Fed's forecasting architecture — arguing that the Fed's overreliance on models when it deemed inflation transitory in 2021 broke the institution's credibility.
• Fed officials are treating the Iran war's current impact as a harbinger of 2021-like inflation that could choke off economic growth.
• But looking through a shock that isn't temporary, as the Fed did five years ago, could allow inflation to become entrenched in ways that would haunt Americans for years to come.

Driving the news: In a speech on Friday, San Francisco Fed president Mary Daly presented a diagnostic tool that might have caught the inflation misjudgment earlier and that has much to say about the challenges policymakers face today.

• The dashboard tracks nearly a dozen inflation indicators — from supply chain pressures and labor market tightness to consumer expectations — and maps how far each deviated from historical norms in the months between 2020 and 2022.
• By September 2021, the chart was already turning dark red across demand, cyclical and supply chain measures — a broadening signal that more long-lasting inflation might have been taking hold.

What they're saying: "It indicates that a lot of the elements of inflation that would be persistent were flashing red," Daly said, speaking at the Hoover Institution's annual monetary policy conference before an audience of top economists and current and former Fed officials.

• Daly noted the dashboard didn't exist when the Fed was writing down its inflation projections in 2021, and asked whether it might have changed the picture policymakers were seeing, if it had been available.
• "This dashboard would likely have been helpful in understanding there was more there than what was obvious from the conventional wisdom," she added.

What to watch: Applied to today's dual tariff-energy shock, the dashboard tells a more reassuring story.

• Tariffs register as barely a flicker: Core goods and import prices are only starting to show faint pink in early 2026.
• "That made it easier to have more confidence — not complete confidence, but more confidence — that looking through [the tariffs] was a reasonable strategy to have, while being watchful that something else might change," Daly said.
• She added that conversations with business leaders about how much they are passing tariff costs to consumers helped support that view.

Yes, but: Effects from the Iran war on top of the tariff impact are more concerning, with an indicator for oil prices and global commodities showing warning signals. Still, labor market indicators and inflation expectations remain largely cool.

• "You're starting to see red in the areas that you'd expect. That's the thing that could lead to more persistent pressure on inflation," Daly said.
• "If an oil price shock turns out to limit supply chains ... because once they get clogged up, it takes a long time to bring them back — that's the thing that could lead to more persistent pressure on inflation."

Zoom in: Daly drew an explicit connection between her framework and a separate presentation at the conference by Chicago Fed president Austan Goolsbee. His models suggest AI's productivity potential could push rates higher if markets are already pricing in the boom.

• "You'll never know anything for sure — you're going to have to have a preponderance of evidence," Daly said, suggesting the Fed can lean on better tools to navigate any major structural uncertainty.

This basic question — whether the inflation now being driven by tariffs and the Iran war is a transitory phenomenon that the Fed should look through — is set to be the immediate challenge for the Warsh Fed.

• But over the medium term, he is likely to face risks around fiscal dominance, the dollar's safe-haven status and the limits of central bank independence.
• That was the consensus of scholars and former officials gathered at Hoover, Warsh's intellectual home for the last 15 years.

State of play: A throughline from a day of presentations was that the challenges facing the next Fed chair cannot be understood in isolation.

• Historian Michael Bordo, a Hoover Institution fellow, warned that "history shows us that if you have a big enough fiscal shock, the central bank loses independence" — a risk that feels less theoretical given the trajectory of the U.S. fiscal situation.
• Stanford economist Hanno Lustig argued that central bank independence alone won't protect the Fed from fiscal dominance and that bond market stress events triggered by fiscal shocks could force the very interventions that blunt market discipline.

Former Secretary of State Condoleezza Rice, the Hoover Institution's director, put the challenge plainly: "We can no longer ask the kinds of questions we talk about in international economy and political economy separately from the questions we ask about national security and technological developments."

The bottom line: "Kevin Warsh is the dog who caught the car," John Cochrane, a senior fellow at Hoover, told Politico's Victoria Guida, referring to Warsh's longstanding desire to lead the Fed. "I say that with great affection and sympathy."