What the Federal Reserve can see, therefore, is a delayed price effect: even if the economy feels only mildly difficult for the average consumer today, current raw-material prices are likely to make it worse months hence. Even if the present crisis were suddenly to abate, production chains make it likely that higher prices will persist for months.

Yet the problems that the Western economy – in which the US is the enormous gorilla in the room – faces are not limited to price increases resulting from the war. There is also the ongoing case of jitters in the sovereign-bond market.

A Parallel Government Borrowing Problem

Put simply, governments are paying far more today to borrow money than they were a year ago. In September 2025, the US government’s five-year bond was generating annual yields – the effective interest rate the government pays – of 3.67%. Today, that number is 4.86%. That general increase in borrowing costs has pushed the US government’s annual debt-interest bill above $1tn, adding to the need for even more borrowing.

The Federal Reserve’s decision to increase rates will make that more expensive again, which may be a contributing factor to presidential rage over the decision.

Yet from an economic perspective, the Federal Reserve is acting with clear albeit cold eyes. It knows something that very few economists ever admit publicly: the only cure for inflation is a recession.

The Cure Is Almost as Bad as the Disease

Rising prices occur when too much money chases too few goods. Since central banks cannot, through their policies, increase the supply of goods, they are left with only one tool in their arsenal: reducing the supply of money. That is what the Federal Reserve is now moving to do.

When it does so, it will directly affect families and consumers. The costs of mortgages will increase. Governments, unable to borrow as much, will have to increase taxes or cut spending. Companies, also able to borrow less, will have to cut costs. The net effect of higher interest rates, deployed to combat inflation, is to make ordinary people poorer.

And that is the point.

When families have less money to spend, they cannot afford to buy as much as they normally would. This, in turn, drives down demand and therefore prices. Thus, the value of a single dollar increases, as it can purchase more.

Politicians and Central Bankers: Sworn Enemies?

The enduring conflict between elected governments and independent central bankers is therefore obvious, explaining Trump’s anger with the Fed: elected politicians hate recessions a great deal more than they hate inflation.

A government, faced with inflation, can simply lean into it until the next election: it can borrow money and dole it out to the population. It can cut taxes. It can do dozens of things to “support the poorest in society”. All the while, the central banker trying to fight inflation – which makes everyone poorer in the long run – must work against the government by trying to actually make the voters less well off.

In the end, and over the longer term, the central bankers always win. That is because they, ultimately, can control the price of government borrowing until it reaches a point where the politicians can no longer afford to borrow for their tax and spending packages.

This Time, Governments Are Stuck

In various Western countries, that moment is clearly approaching: the evidence is in the bond markets. The cost of government borrowing in countries like the US, the UK and even Germany is rapidly approaching unsustainable levels. When that is combined with inflation, a very serious recession awaits.

That the Iran war, or non-war, has turbocharged this phenomenon is obvious. Yet it has also been made more likely by the stagnation of Western economies and a relative lack of growth over several decades. The US national debt was nearly $20tn when Donald Trump first took office in 2017, but between him and Joe Biden – neither party apparently concerned about the matter – it has roughly doubled to about $40 trillion in less than a decade.

The costs of that fiscal indiscipline are starting to come home to roost. Consumers would do well to prepare themselves for a long, challenging winter. With not much hope of a fair spring to follow anytime soon.