Best Of: How the Fed Is ‘Shaking the Entire System’

Fed Credibility

The Federal Reserve's credibility is a pivotal factor in its policy effectiveness. Ezra Klein and Adam Tooze discuss how the Fed's actions are not just about economic adjustments but also about shaping public perception. Tooze compares this to parenting, where the credibility of threats influences behavior:

There's a big difference between your parents saying, do this or else, and them saying it and doing it in a way which means, you know, that, you know, the punishment will be forthcoming.

--- Adam Tooze

Tooze argues that the Fed's recent hawkish stance, influenced by inflation hawks, may not be entirely misplaced, but questions remain about the duration and impact of its tightening cycle 1 2.

   

Poly Crisis

The concept of a poly crisis highlights interconnected global challenges. Tooze explains that these crises are more than the sum of their parts, creating a complex web of issues that are difficult to untangle. He uses the term to describe the regional crises in South Asia, where climate shocks and economic pressures converge 3.

A poly crisis is when you have a whole series of interconnected fires, which then, you know, turn into a general. A firestorm, a conflagration, which is larger than the sum of its parts.

--- Adam Tooze

Klein and Tooze also discuss the Fed's role in these global dynamics, noting that its focus remains primarily on the U.S. economy, often overlooking the broader impact on emerging markets 4.

   

Inflation Dynamics

Today's inflationary dynamics differ significantly from the 1970s. Tooze points out that the current situation lacks the organized labor push seen in the past, with wage adjustments happening on an individual basis 5. He emphasizes that the political and economic contexts have changed, making direct comparisons to the 1970s misleading.

We are, in a sense, sort of shadowboxing here around the actual question of what the political economy of price and wage setting is.

--- Adam Tooze

Tooze forecasts a downturn in the real estate market, driven by rising mortgage rates, which could lead to a broader economic slowdown. Despite invoking the spirit of Volcker, he believes current measures won't mirror the drastic actions of the past 6.