US Daily: Would Hikes Help?

Research evidence excerpt

US Daily: Would Hikes Help?

Goldman Sachs US Daily

by about 250bp at the peak. We estimate that tariffs provided a peak boost of 80bp,

similar to estimates from other economists. And we estimate that the war with Iran will

provide a boost of 40bp through oil and other commodity prices.

The right side of exhibit 2 shows, that estimates of the slope of the Phillips curve—the

impact of a 1pp increase in the unemployment rate on inflation—average roughly

-15-20bp in PCE terms and -30-35bp in CPI terms (the impact is larger in the shelter

category, which has a much higher weight in the CPI). These effects can be larger when

the labor market is very tight or smaller when it is very weak. Today the effect should be

about average because the labor market is in a fairly normal balance, though it would

grow if the labor market tightened meaningfully.

Taken together, this implies that it would usually take a large increase in unemployment

to fully offset the impact of a supply shock. For example, these estimates imply that it

would have taken several percentage points of additional unemployment to fully offset

the effects of tariffs. Former Fed Chair Janet Yellen recently highlighted this as one of

the key lessons of recent years: “Monetary policy cannot tame supply-driven inflation

without exacting unacceptable unemployment costs.” Those steep costs, she added, lie

behind the standard central bank wisdom that “Looking through supply shocks should

remain the default strategy unless inflation expectations are at genuine risk of becoming

unanchored.”

Exhibit 2: The Effects of Supply Shocks on Inflation Can Be Large, While the Effects of Changes in Resource Utilization Are

Moderate, Meaning It Takes a Lot of Unemployment to Offset the Impact of Supply Shocks