This quarterly installment of our economic and market observations discusses two generational shocks: the pandemic and a major land war in Europe. Serving as stress tests of the Federal Reserve’s (Fed’s) new monetary framework, we explain why the Fed failed in addressing them appropriately.
In our view, the Fed did not appreciate the sectoral incidence of the shocks, the size of the global fiscal response, and the danger of making inflation a salient concern of households and firms.
As long as the Fed emphasizes the external drivers and not the internal design flaw, we believe inflation will persist well above goal even as the US economy slips into recession.
The rest of the world's economy is probably more at risk as it absorbs Fed tightening, is closer to the center of conflict, and has not resolved the pandemic threat.