The task of Central Banks is always more difficult when the economy suffers a supply shock that has simultaneous effects: upwards on inflation and downwards on economic activity and unemployment."
All supply shocks (necessarily sectoral) have those simultaneous effects. But some supply shocks (COVID) are accompanied by negative aggregate demand shocks, too, so the downward side is redoubled.
The useful discussion of wage setting is in the end about how anchored are nominal expectations. How much danger is there of nominally downward sticky prices becoming real-ly downwardly sticky? Still, something to keep an eye on but not enough to prompt a preemptive tightening. I’d think TIPS data are useful although they could be more useful is Treasury woud create some intermediate 1.2. and 3year TIPS.
“The Fed reacted quickly and pivoted to a restrictive monetary policy in March 2022,”
Not quickly enough. TIPS expectations were above target by September 2021. The Fed was even talking about tightening in November. But that had to do with how quickly to disinflate after a supply shock response inflation, not about how much to inflate if any as a supply shock response.
I’d like to hear more about the fat/skinny balance sheet issue.
Many thanks for your comments. Regarding the Fed, I highlighted that it was hugely delayed in 2021, but when the Ukraine war started it reacted quickly in March.
"Policy rate decisions
The task of Central Banks is always more difficult when the economy suffers a supply shock that has simultaneous effects: upwards on inflation and downwards on economic activity and unemployment."
All supply shocks (necessarily sectoral) have those simultaneous effects. But some supply shocks (COVID) are accompanied by negative aggregate demand shocks, too, so the downward side is redoubled.
The useful discussion of wage setting is in the end about how anchored are nominal expectations. How much danger is there of nominally downward sticky prices becoming real-ly downwardly sticky? Still, something to keep an eye on but not enough to prompt a preemptive tightening. I’d think TIPS data are useful although they could be more useful is Treasury woud create some intermediate 1.2. and 3year TIPS.
“The Fed reacted quickly and pivoted to a restrictive monetary policy in March 2022,”
Not quickly enough. TIPS expectations were above target by September 2021. The Fed was even talking about tightening in November. But that had to do with how quickly to disinflate after a supply shock response inflation, not about how much to inflate if any as a supply shock response.
I’d like to hear more about the fat/skinny balance sheet issue.
Many thanks for your comments. Regarding the Fed, I highlighted that it was hugely delayed in 2021, but when the Ukraine war started it reacted quickly in March.
Well said on the inflation expectations issue.
Many thanks for highlighting that!
A tour de force on central reactions to the shock!
Many thanks Erik