For decades, investors have assumed that central banks can always find a middle ground between fighting inflation and supporting economic growth. In a recent article titled “Interest Rates: Goldilocks’ Outcome or Hobson’s Choice?”, Prof. Janek Ratnatunga, CEO of CMA Australia and CMA ANZ, argues that this assumption may no longer hold.

According to Ratnatunga, the newly appointed U.S. Federal Reserve Chairman Kevin Warsh faces a difficult reality. America’s debt burden has become so large that every major policy option now carries significant consequences. Rather than facing a “Goldilocks” scenario where policymakers can find a solution that is “just right,” Ratnatunga argues that the Fed now faces a Hobson’s choice—a situation where there appears to be a choice, but in reality, every option comes with a painful trade-off.

Three Paths Facing the Federal Reserve

His argument revolves around three possible paths.

The first is to raise interest rates aggressively to defend the U.S. dollar and contain inflation. While this could strengthen the currency, Ratnatunga argues that the economic cost may be far higher today than during previous inflation battles. U.S. federal debt has climbed to more than $37 trillion, or about 124% of GDP, meaning the country now owes substantially more than it produces in a year. In such an environment, sharply higher interest rates would not only hurt consumers and businesses but could also cause the government’s own interest expenses to rise dramatically, increasing the risk of a recession.

The second option is to continue supporting government borrowing through money creation and quantitative easing. This keeps financial markets functioning and prevents a debt crisis but gradually reduces the purchasing power of the dollar through inflation. Ratnatunga believes this is the path policymakers are most likely to choose because it spreads the pain over many years rather than causing an immediate economic downturn.

The third option is geopolitical rather than monetary. Ratnatunga argues that much of today’s inflation pressure stems from rising energy prices caused by the conflict involving Iran and the closure of the Strait of Hormuz, through which roughly 20% of the world’s oil supply normally passes.

According to his analysis, a de-escalation of the conflict and the reopening of Hormuz could help bring oil prices down, ease inflationary pressures, and reduce the need for aggressive monetary intervention. However, he believes such a move could come at the cost of American geopolitical influence and credibility if it is perceived as a strategic retreat. In his view, while this path may help stabilize inflation, it could weaken confidence in America’s ability to project power globally and support its allies.

Ratnatunga ultimately concludes that policymakers will likely choose inflation over recession. In his view, the United States is more likely to tolerate a gradual decline in the purchasing power of the dollar than risk a sudden collapse in economic activity.

Released by: The Institute of Certified Management Accountants (Australia and New Zealand)

Date: 5 June 2026

Location: Melbourne, Australia