The war in Ukraine threatens to keep costs high for longer. Gas prices have already risen sharply, causing inflation to rise as consumers pay more at the pump. Supply chain disruptions – and shortages in Russian and Ukrainian exports such as neon, palladium and wheat – could curtail car and food production and freight transport, exacerbating global shortages.
Now, new virus restrictions in Shanghai and Shenzhen, China, a major technology manufacturing center and port city, increase the risk that supply chains will continue to be disrupted in the coming months. Those external shocks come at a time when price pressures have already started to spread to categories like rent, another development that could keep inflation going.
It’s not clear whether those factors will keep inflation drastically higher, but Fed officials will be wary.
If the Fed has to raise interest rates to painful levels to cool the economy and put pressure on prices, it could cause the financial markets to collapse, causing stock and housing stocks to disappear. It could also slow wage growth and take people out of their jobs if companies cut spending, limiting investment and staffing.
But Fed passivity – or under-performance – would also carry risks. High prices that reduce consumer purchasing power year after year would make it difficult for families and businesses to plan for the future. They can especially hurt those who are unemployed and live on savings, or the poor, who spend a large part of their budget on necessities and have less room to cut corners when costs spiral out of control.
mr. Volcker, mr. Powell’s long-ago predecessor, one of his professional idols, and — possibly, if things go wrong — his muse, died in 2019. But he had thoughts on the trade-off.
Maintaining confidence that a dollar can buy tomorrow what it could buy today is “a fundamental responsibility of monetary policy,” Mr Volcker wrote in his 2018 memoir. “Once lost, the consequences can be severe and stability difficult. to recover.”