The Federal Reserve may not be able to treat supply shocks as temporary this time, according to Beth Hammack, as the US enters the latest energy shock with inflation already elevated. While she reiterated that her baseline is for policy to remain on hold “for a good while,” she stressed that the current backdrop is fundamentally different. “We’ve been above that 2% goal over the past five years. Individuals have experienced a decade’s worth of inflation…in that time period” .
Hammack emphasized that the key uncertainty lies in “how high are energy prices going to stay and for how long are they going to stay there.” A prolonged rise would be “more inflationary,” but the impact is not one-sided. “If it starts to impact consumers and their willingness to spend, that could mean that we see some impacts flow through in the growth numbers…that could ultimately flow through into the employment numbers.” This leaves the Fed facing a delicate balance between containing inflation and avoiding a sharper slowdown.
Crucially, she warned that the Fed’s traditional approach may no longer hold. While policymakers have often looked through supply shocks as temporary events, “all of these successive supply shocks are hard to think about” in terms of policy response. With inflation already elevated, “it may not be the same as it would be had we been entering this period at low and stable inflation.” For now, that reinforces a “patient” stance, but also signals a more complex reaction function where the Fed may be forced to respond to shocks it would previously have ignored.
