The Fed may not look past the latest global supply shock

Fed chair Jerome Powell was asked at the March Federal Open Market Committee press briefing about why supply shocks have become more frequent of late and how the Fed should respond to them. Powell answered that he viewed the COVID-19 pandemic, Trump’s tariff hikes and the past two oil price spikes as isolated events.

The Fed’s policy stance has been to look past them on grounds that interest rate adjustments cannot fix supply disruptions, but they could damage the economy. However, Powell acknowledged that recent shocks have hindered progress in lowering inflation, which is why the committee opted to keep policy unchanged. 

Jon Hilsenrath argues in a Fortune commentary that it’s time to ask whether the series of shocks are a harbinger of change resulting from global economic disorder. If so, he contends that inflation could prove more stubborn than the Fed projects, and inflation expectations could become ingrained. 

My take is that the Fed is not alone in viewing global shocks as isolated events. It is how most economists have been taught to think about currency crises and asset bubbles that followed the breakdown of the Bretton Woods system in the early 1970s.

In my book, “Global Shocks,” I differentiate incidents that are associated with high inflation and currency volatility from those that occur when inflation is low. The main finding is that there was a predictable pattern of market behavior during the 1970s and 1980s, when central banks tightened monetary policy to combat inflation. But market responses were less predictable during the ensuing period........

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