00:00How would you advise the Fed to respond to the rising price of oil?
00:04And we teach that when there's a demand shock,
00:07it's a pretty natural set of recommendations that emerge for the Fed.
00:11But when there's a supply shock, like this energy price shock,
00:15there's trade-offs that the Fed has to juggle.
00:17How do you make those trade-offs in general,
00:19and how do you make those trade-offs in this particular instance?
00:22And can you help everyone with their piece of it?
00:24Maybe they should tell me.
00:27Sure. So to start with what you said, our tools work on demand.
00:32Higher rates will tend to moderate demand.
00:35Lower rates will tend to stimulate demand.
00:37And when you have a supply shock,
00:39our tool doesn't have meaningful shorter-term effects on supply.
00:44So when you have a supply shock, the first question is, do you respond to it?
00:48And the classic question has been around energy, just in general.
00:53I'm not really speaking about the current situation.
00:54Although I'll get to that, I guess.
00:56But energy shocks have tended to come and go pretty quickly.
01:01Monetary policy works with long and variable lags, famously.
01:05And so by the time the effects of a tightening in monetary policy take effect,
01:11the oil price shock is probably long gone,
01:15and you're weighing on the economy at a time when it's not appropriate.
01:18So the tendency is to look through any kind of a supply shock.
01:23But a critical, essential aspect of that is you have to carefully monitor inflation expectations,
01:29because you can have a series of these supply shocks,
01:32and that can lead the public, generally, businesses, price setters, households,
01:39lead them to start expecting higher inflation over time.
01:41Why wouldn't they?
01:42At the end of a certain number of years, inflation is now just higher, and that can happen.
01:47So you monitor that very, very carefully.
01:50Also, in the current situation, you have to be mindful of the whole broader context.
01:54And the broader context is we're still, you know, we've been coming down close to 2% post-pandemic,
02:01but we've never actually, you know, gotten right and stayed at 2%, so it's been a while.
02:08And we're very mindful of that fact.
02:10Inflation expectations do appear to be well anchored beyond the short term,
02:14but nonetheless, it's something as we will eventually maybe face the question of what to do here.
02:20We're not really facing it yet because we don't know what the economic effects will be,
02:24but we'll certainly be mindful of that broader context when we make that decision.
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