Global supply disruptions fueling persistent inflation are not random shocks but deliberate acts of geopolitical leverage, a former Federal Reserve official has warned. Patrick Harker, former president of the Federal Reserve Bank of Philadelphia, argues that policymakers must reframe their understanding of these events as 'supply coercion' rather than temporary shocks.
Deliberate Geopolitical Leverage
Harker cited Russia's decision to cut off natural gas supplies to Europe in retaliation for Western sanctions as a prime example. 'What Russia did to Europe's gas supply was none of those. It was a deliberate act, executed for political purposes, using a chokepoint Russia controlled,' he wrote. Similar tactics include Houthi rebels attacking shipping lanes in the Red Sea and Iran's closure of the Strait of Hormuz, which halted one-fifth of global oil supplies.
'A shock is surprise. A shock is the kind of thing you absorb, smooth out, and move past. What Russia did was none of those.'
Monetary Policy's Limited Reach
Harker emphasized that traditional monetary policy, which targets demand, cannot address deliberate supply constraints. 'The Fed isn’t a logistics company. It isn’t a defense department,' he noted. He also pointed to domestic disruptions, such as former President Donald Trump's tariffs, as contributing factors. These actions create a 'bind' for policymakers, caught between coercion abroad and at home.
Implications for Inflation Control
Current Federal Reserve officials are grappling with the challenge of persistent inflation compounded by these strategic disruptions. Boston Fed President Susan Collins recently stated that years of above-target inflation have eroded her patience for treating price spikes as transitory. Fed Governor Chris Waller echoed this sentiment, warning that policymakers must remain vigilant in the face of repeated disruptions.
Harker concluded that the term 'shock' is no longer applicable. 'The world has stopped resetting,' he warned, urging policymakers to adopt a new framework to address the evolving economic landscape.