Warning Shots in the Dark

We found it striking that a lot of discussions in Jackson Hole focused on the inordinate level of uncertainty central banks are facing right now while the policy conclusions – “keeping at it” on the monetary tightening – were crystalclear. This reflects the profound change in how central banks view the distribution of risks. With higher probability of inflation turning persistent, they feel compelled to act forcefully, even if the macro environment is unusually volatile. This is the symmetric approach to what prevailed during the “great moderation” when it is the deflation risk which was calling for decisive accommodative action.