Central Banking in an Age of Global Supply Shocks
Şebnem Kalemli-Özcan TOKYO—As G7 finance ministers were meeting in Paris this month, the bond market was telling us what their official communiqués would not. The 30-year US Treasury yield touched 5.2% on May 19—the highest rate since 2007—while Germany’s 10-year Bund hit a 15-year high and the 30-year Japanese government bond set a fresh record of its own. These movements came after the US Federal Reserve decided, in April, to hold rates at 3.5–3.75%, with the Federal Open Market Committee more divided than it has been in three decades. Across the Atlantic, markets put the odds of a European Central Bank rate hike by December at 85% . After five years of being told that inflation was transitory, then conquered, then transitory again, investors have concluded otherwise. Monetary policy is operating in a new environment, under conditions that are fundamentally different from those in which modern inflation targeting was designed...