Get Into the Minds of Central Bankers as They Navigate Shocks

HAVE YOU EVER WONDERED how central bankers forecast the impact of shocks on the economy?

- OWEN MINDE, ANDREW HUSBY, and DAN HANSON

The Federal Reserve, European Central Bank, and Bank of England all use complex macroeconomic models to help shape their decisions. Trouble is, engaging with those models requires Ph.D.-level economics—and even then, a lot of head-scratching.

Bloomberg Economics has a simpler solution. {SHOK } is a new function that provides an interactive model of the U.S., euro area, and U.K. economies. Its intuitive interface makes it easy to explore how surprises in fiscal policy, exchange rates, credit spreads, or other factors affect the outlook for growth, inflation, and monetary policy.

LET’S USE SHOK to examine two possible disruptions to the U.S. First, we’ll look at what happens if the Federal Reserve scares the market by withdrawing stimulus too early, triggering a sharp rise in borrowing costs. Next, we’ll examine the potential consequences if Chair Jerome Powell and his team move too late, allowing inflation to run out of control, and have to slam on the brakes to prevent a spiral higher.

To launch the model, run {SHOK }. Make sure United States is selected in the amber box in the top left. To set the period to 4Q21, use the drop-down next to Apply Shocks To. Then move the Forward Guidance slider to 50. In the model, that adds 50 basis points to the risk-free, five-year borrowing rate in the fourth quarter. That’s broadly equivalent to the shock that occurred in 2013’s taper tantrum, when bond yields rose after then-Fed Chair Ben Bernanke said the central bank was considering scaling back its bond purchases.