Playing the economy on hard mode

Central bankers aren’t known for their wild exuberance, but even by their standards the who’s-who of monetary policy struck a somber tone at Jackson Hole over the weekend.

Driving the news: A chorus of the world’s top central bankers and economists warned that despite some recent hopeful signs, the economy is still not good and there's likely to be more pain on the way.

  • IMF deputy managing director Gita Gopinath told the Financial Times there was “a real risk” of stagflation (when inflation remains high even though the economy doesn’t grow).
  • US Federal Reserve chair Jerome Powell said he would continue hiking interest rates to tame inflation, even though doing so would likely lead to slower growth and job losses.

Why it’s happening: The growing risk of negative supply shocks was a common theme underlying the warnings coming from Jackson Hole.

  • A negative supply shock is a sudden, unexpected event that reduces the availability of a product or commodity, often causing its price to rise.
  • Much of the inflation we’re experiencing now is driven by supply shocks, like the pandemic and Russia’s invasion of Ukraine.

But central banks only have one effective tool for dealing with that inflation: higher interest rates that lower prices by suppressing demand, a process that can be painful for both workers (who lose jobs) and businesses (who lose customers).

  • The combination of unpredictable prices and a limited toolbox to keep everything stable is making the economy more volatile.

Bottom line: A recent bounce back in the stock market and signs of inflation peaking looked like reasons for optimism about the economy, but the clear message from Jackson Hole is don’t get your hopes up.