The Federal Reserve has spent more than five years promising the American public that policymakers will bring inflation sustainably back to the central bank's 2% annual target. On Sept. 16 the Fed raised interest rates in pursuit of that goal.

John Cochrane, a prominent economist and senior fellow at the Hoover Institution at Stanford University, thinks that higher rates are a short-term solution, at best. His research suggests that inflation will resume climbing unless fiscal policy also changes and the U.S. brings its borrowing and spending under control. Without more restrictive fiscal policy, he says, the Fed can only rearrange inflation in the face of a mountain of federal debt that recently surpassed $40 trillion. That's because higher rates push up the government's interest costs, leading to higher inflation in the long run.

Cochrane, previously a professor of finance at the University of Chicago Booth School of Business, has laid out these and other ideas in his popular blog, The Grumpy Economist. He spoke with Barron's on Sept. 11 about his economic research, the U.S. Treasury's buyback of longer-dated debt, and the changes that Fed Chairman Kevin Warsh is implementing. An edited version of the conversation follows.

Barron's: Your economic model shows that lower interest rates will lead to lower inflation. That's quite contrarian. How does it work?

John Cochrane: It isn't that simple. I should probably start by pointing out that this conclusion bubbles up from equations and economic theory. We don't know exactly how it works. The Federal Reserve and all central banks pretend to have massive technocratic competence, but the connection between higher interest rates and inflation isn't well-known.

Central bankers tend to think that raising interest rates lowers demand, and somehow that lowers employment, which feeds into lower prices. That is basically late-1960s economics. Since then, we have tried to create economic models that draw on real people and businesses, and the decisions they are likely to make. In doing so, out pops this uncomfortable conclusion that in the long run, if you raise interest rates, inflation goes up. If the Fed raises interest rates, interest costs on debt go up.

How does that lead to broader inflation?

There is plenty of experience. Central banks raise interest rates. The exchange rate goes up and demand and inflation go down. But that experience is all short-run experience. There have been many times in history when central banks raised interest rates and inflation went up.

The question is: What happens if the Fed raises or lowers interest rates and there is no simultaneous response in fiscal policy? Successful disinflation generally has come with tighter fiscal policy and microeconomic reforms that let the economy grow more.

There are also experiences of inflation coming down without higher interest rates. In Argentina, President Javier Milei eliminated a chronic fiscal deficit, and inflation came down and interest rates fell. On the other hand, Turkey's president, Recep Tayyip Erdogan, had the central bank lower interest rates, and it was a disaster because his government was still printing money to finance deficits.

What you are getting from this is inflation always hinges on both monetary and fiscal policy.

Explain this further, please.

That lower interest rates reduce inflation in the long run bubbles up in the standard economic models of the past 30 years. It is as robust as it is uncomfortable. There are two key ingredients: First, the interest rate you get has to make up for the loss of purchasing power of the money in the long run. The real rate of return has to be roughly the same. The fancy economic word is "neutrality." In the long run, interest rates and inflation go in the same direction. And we see that over time and across countries.

Second, the economy is stable. If the Fed fixes the interest rate and leaves it there no matter what happens, holding constant how much Congress spends and taxes, and nothing else changes-inflation goes away. That's more contentious, as traditional doctrine holds that inflation or deflation would spiral.

So, which view is right? Historically, there are few episodes where central banks left interest rates alone enough to tell stable from unstable. But our central banks just did that. We just lived through 10 years of interest rates stuck at the zero bound. Japan had 30 years of interest rates stuck at zero. Conventional wisdom said the whole time, here comes the great deflation spiral. We need more quantitative easing. We need massive fiscal stimulus. But nothing happened. Inflation was stable. If the economy is stable and neutral, lower interest rates eventually have to lower inflation.

Now, lower interest rates can still raise inflation in the short run. The conventional view is often right, for a while. But not always. You can see lower interest rates and lower inflation right away, immaculately, with no recession and no tight money. That happens when you solve the underlying long-term fiscal problem. It is possible, and it has happened many times.

Suppose we solve Social Security and Medicare funding and all the Congressional Budget Office forecasts were heading in the right direction. Or maybe artificial intelligence zooms the economy, and the federal government starts raking in money. Once people know that a long-term debt problem is solved, inflation collapses and interest rates collapse, too.

But we are so accustomed to thinking that if inflation is high, the Fed needs to raise rates.

That still may be true. In the models, there is a short-run effect in the opposite direction. So, if the Fed raises interest rates again and Treasury does nothing, that makes inflation go down for a while. It just comes back to kick you in the pants later on.

When you look at successful disinflation, the Fed raises interest rates, inflation goes down-but also other things come and help that disinflation along. So, the model doesn't deny that raising interest rates is helpful. It just says that might not last as long as you think.

Are earlier economic models less useful today because of the country's $40 trillion debt load?

Yes. If you really want to lower inflation in the U.S., the most important thing is that the Fed can't do it alone. Given the U.S.'s unending deficit, bondholders eventually will lose faith in the country's ability to pay off its debt. That is what overhangs monetary policy. The Fed can't solve inflation when the country has a big, unresolved deficit.

For most of U.S. history, this wasn't a problem. We understood that the government was going to raise taxes and pay off its debts. Now, if the Fed raises interest rates, it raises interest costs on the debt, which adds to the fiscal pressure on inflation. Inflation always and everywhere stems from the relationship between monetary and fiscal policy.

What was the Treasury's intention in buying back more than $5 trillion of longer-term debt?

One way of viewing it is that it was just a directional bet on interest rates. Suppose you're a hedge fund or a big issuer like the U.S. government. Suppose the Treasury secretary knows that inflation is going to come down and thus interest rates are going to come down in the future. As a bond trader, that means you should buy back all of your long-term debt at low prices. Remember, high interest rates are low prices. [Bond prices move inversely to yields.]

You buy back your long debt at absurdly low prices and re-fund by issuing short-term debt. Then, when interest rates come down, you can reissue long-term debt at lower yields.

There has been a lot of discussion among economists and policy types about a new Fed-Treasury accord, which would coordinate policy between the two to ensure they aren't working at cross-purposes. Will it happen?

That is the question we should all be asking more than we are. We talk about fiscal and monetary policy being separate, but that doesn't work with today's huge debt and deficits.

After World War II, the U.S. had a lot of debt piled up for good reason. The Fed was instructed to hold long-term interest rates at 2.5% to keep costs on the debt reasonable. There was no pretense of an independent Fed. The Fed became independent in 1951 when, through an accord, it gained its authority to raise interest rates above 2.5%-even though that was going to hurt the Treasury.

The interesting thing right now is the silence of the Fed. Why is the Treasury buying long-term bonds rather than the Fed, which traditionally did?

What would a modern accord look like to you? I would like to see a Fed-Treasury Accord that makes it clear the Treasury is responsible for the maturity structure of the debt. Such an accord should outline the fiscal and monetary issues and how they coordinate. When does the Fed jump in to hold down long-term rates to help the government's fiscal position? And what does that involve?

Some critics say less communication from the Fed is injecting uncertainty into the bond market. Is that fair?

There has been a lot of hand-wringing about Warsh's refusal to tell us where interest rates are going. I think Warsh is right that the forward-guidance experiment needs to be turned off. The idea behind forward guidance was that when rates were in the zero-bound range, the Fed couldn't stimulate growth by lowering interest rates, but it could make promises about what it would do in the future. A promise to keep rates low in the future would lower long-term rates and stimulate the economy.

I was critical at the time, saying the Fed could make whatever promises it wanted, but when the time came, it could do what it wanted. Turns out that when the time came to raise rates, the Fed held rates lower for longer and contributed to the spurt of inflation. It isn't clear that those promises did much stimulating at the time.