Fed’s Brainard: Successive supply shocks a challenge for central banks

“The successive shocks to global supply chains from the pandemic and the war in Ukraine could ‘herald a shift’ to an era of more volatile inflation and force central banks to guard against it with tighter monetary policy,” Fed vice chair Lael Brainard said in remarks released on Monday by the U.S. central bank, reported Reuters.


The US Dollar is higher in the North American trade with US stocks on the backfoot amid a global risk-off start to the week. Major market averages opened trading on Monday lower as protests in China over COVID lockdowns brought some selling pressure to global equities.

Early on the Dow dipped 0.4%, the S&P 500 slid 0.5%, and the Nasdaq lost 0.4%. DXY is up 0.18% to 106.25, but the downside is open while below 106.60:

Key Quotes

Monetary policy often recommends officials ‘look through’ supply shocks that are expected to be temporary, an approach that the Fed used initially when U.S. inflation rose for what were expected to be one-off ‘transitory’ reasons.

The experience with the pandemic and the war highlights the challenges for monetary policy in responding to a protracted series of adverse supply shocks.

If supply continues to prove slow to respond ‘due to challenges such as demographics, deglobalization, and climate change, it could herald a shift to an environment characterized by more volatile inflation compared with the preceding few decades.’

A protracted series of adverse supply shocks could persistently weigh on potential output or could risk pushing inflation expectations above target in ways that call for monetary policy to tighten for risk-management reasons.


But the sequence of such shocks faced in the last two years, with one handing the baton to the other, ‘blurred the lines about what constitutes a temporary shock as opposed to a persistent shock to potential output.’

Even when each individual supply shock fades over time and behaves like a temporary shock on its own, a drawn-out sequence of adverse supply shocks that has the cumulative effect of constraining potential output for an extended period is likely to call for monetary policy tightening to restore balance between demand and supply.


John Williams

Hawkish Fed’s speakers have recently helped the EUR/USD bears and so did the comments from Fed’s Brainard. Earlier on Monday, New York Federal Reserve Bank President John Williams on Monday said that he believes the Fed will need to raise rates to a level sufficiently restrictive to push down on inflation, and keep them there for all of next year:

“I do think we’re going to need to keep restrictive policy in place for some time; I would expect that to continue through at least next year,” Williams said at a virtual event held by the Economic Club of New York, adding that he does not expect a recession.

“I do see a point, probably in 2024,” when the Fed will start reducing interest rates, he said.