Unanticipated exogenous shocks likely: U.S. Fed

The Vice Chair pointed to three looming risks that could derail progress on inflation and economic recovery: a resilience in consumer spending that outpaces expectations, a potential weakening in employment as supportive factors wane, and the ever-present shadow of geopolitical tensions, particularly in the Middle East. “Unfortunately, the history that I have reviewed today suggests that we should not be surprised if some kind of unanticipated shock occurs. Given that we must accept that uncertainty is present, we consider the risks that can affect our outlook and forecasts,” said Jefferson. The mention of these risks paints a picture of a global economy at a crossroads, with the potential for escalated conflicts to disrupt commodity prices and shake the foundations of financial markets worldwide.

Jefferson, however, expressed a cautious optimism regarding the trajectory of inflation, underscoring a commitment to closely monitoring incoming data to steer the course of monetary policy. Yet, the underlying message was clear: the Federal Reserve stands on alert, ready to respond to the unforeseen shocks that history suggests are almost inevitable.

Jefferson emphasised the critical need for policymakers to remain vigilant and adaptable, given the rapid pace at which inflationary trends can shift. This point was underscored by the unforeseen economic repercussions following Russia’s invasion of Ukraine in early 2022, which exacerbated the inflationary pressures already heightened by post-pandemic supply chain disruptions. Moreover, Jefferson warned against the pitfalls of overly aggressive monetary easing in reaction to temporary improvements in inflation metrics. He cited the cautionary tale of 1967, when a premature easing of monetary policy, driven by a desire to counteract slowing economic growth and diminishing inflation fears, ultimately reignited inflationary pressures. “Former Fed Chair Paul Volcker stressed this danger in a 1981 speech, when he pointed to 1967 as a year when monetary policy eased in response to concerns about slowing economic growth and reduced inflation concerns, yet inflation subsequently turned back up,” pointed out Jefferson.