At next week’s Federal Reserve meeting, Kevin Warsh must forcefully challenge the deadly consensus that recent economic data prevents any possibility of an interest rate cut this year.

When 2026 was rung in, market and economic observers anticipated that the Federal Reserve would make several cuts in interest rates. Now the widespread belief is the exact opposite: The Fed must be prepared to raise the cost of borrowing money to curb rising prices.

Why the drastic change in sentiment? The stock answer is that new economic data has fundamentally changed the situation. The recent jobs report was far stronger than anticipated. Business profits are robust. The massive boom in AI-related investments is putting real pressure on the cost of raw materials and electricity. Tariffs are beginning to impact costs for businesses, which will, more and more, be passed on to customers. Consumers haven’t slowed down their brisk spending. And of course, the longer-than-expected Iran war has adversely impacted energy and fertilizer costs by disrupting the availability of oil. This is hitting economies around the world. Moreover, recovery from the damage already inflicted on the oil infrastructure in the Middle East won’t be as swift as originally anticipated. All this, experts tell us, not only precludes cutting rates but also may mean hiking them—perhaps several times—in the months ahead.

The data isn’t lying, but the conclusion drawn from it is profoundly wrong. Hiking interest rates will cause immense and unnecessary harm. Higher mortgage rates, for example, will obviously hurt housing sales, already an economic and political sore point.

The idea of trying to fight inflation by slowing economic activity is preposterous. The Fed, the economics profession and the rest of the financial and commercial world are victims of a profound misunderstanding about inflation. They don’t make the crucial distinction between the impact of monetary inflation and nonmonetary inflation. What we’re experiencing now is the result of events raising costs. The definition of monetary inflation is the reduction of a currency’s value. Disruptions from war are not cured by depressing economic activity; they’re cured by dealing with the causes of those disruptions.

You’d never know it by the current gnashing of teeth, but the dollar has recently shown strength. The price of gold, the best barometer of monetary mischief, has declined from the highs of earlier this year by more than 25% vis-à-vis the dollar. The greenback has done better against other currencies such as the euro and the yen.

Under normal circumstances when currencies are stable in value, marketplace prices fluctuate because of supply and demand. That’s what we’re seeing with the AI boom. We may well see this boom go bust, but that’s normal in a free market. The resulting crash in prices would not be deflation. Many years ago when the auto industry was getting off the ground, the U.S. saw the creation—and demise—of several hundred auto manufacturers before a handful emerged as successful, long-term players.

The idea that prosperity causes monetary inflation is totally unsupported by real-world experiences. Yet the idea is holy writ at the Fed and in the minds of most policymakers. At next week’s meeting, Kevin Warsh must vigorously attack this misbegotten idea, the Phillips Curve. The curve purports that there is a trade-off between unemployment and inflation. Attempting to stimulate or depress the economy based on it is ludicrous. The happy truth is that if the Phillips Curve superstition is laid to rest and the focus instead becomes keeping the dollar stable in value, there is ample room to reduce short-term interest rates

In the meantime, what should policymakers do? The biggest, best and most decisive move by far would be for President Trump—with Israel—to resume the all-out assault on the evil regime in Iran. The war would have been over weeks ago if the U.S. hadn’t prematurely stopped military operations in April. Any agreement with the Iranian thugs won’t be worth the paper it’s written on.