As it tries to play catch up, the Fed hopes to raise rates by enough to cool inflation, but not by so much that the economy crashes. This is easy in the theoretical world of economic models. But in the real world fraught with uncertainty, and at such a high starting point for inflation, it will be a hard trick to pull off. 

Last year from spring onwards, when inflation first started to rear its ugly head, the Fed continued to fuel a roaring US upswing with a needlessly stimulative monetary policy. As policymakers assumed that price pressures would be transitory, they continued to buy massive amounts of government bonds and mortgage backed securities even as growth and inflation consistently surprised to the upside.

Of course, if the Fed triggers a recession, people will say that it tightened too much. But that would miss the key point. More likely, it would merely reveal an earlier policy failure.

Second, in China, policymakers continue to pursue a contradictory set of policies. On the one hand, the authorities still rely on lockdowns as the key tool to control the spread of Covid. While the West has relaxed its restrictions and now accepts that society will have to learn to live with the virus, China remains steadfast in pursuit of an unsustainable ‘zero Covid’ strategy. 

On the other hand, Chinese policymakers are trying to stimulate demand which is faltering amid deep-seated problems in its overleveraged real estate sector. 

The latest round of harsh lockdowns includes Shanghai, China’s preeminent economic hub, the world’s largest port and part of a major artery for global trade. As we learned from our own experience in the West, lockdowns pose a logistical nightmare for production and transport and dramatically slow the transit of goods through ports. 

Throttling domestic and global supply while simultaneously stimulating demand will hurt Chinese economic performance and add to inflation. Zero Covid or decent economic performance? Beijing will need to make a choice.

Third, in Europe, the European Union faces a difficult decision in the months ahead if it wants to further increase sanctions on Russia in response to escalating brutality in Ukraine. The bloc’s leaders are contemplating a full EU embargo on oil imports, which may also extend to gas eventually.