KC Fed, Report: Financial Stress May Do Relatively Little to Reduce Inflation

“Even though both financial stress and monetary policy tightening slow economic activity, they do not necessarily have the same implications for inflation. Our analysis shows that financial stress generates more modest disinflationary effects than monetary policy tightening for the same increase in the unemployment rate. Therefore, to the extent financial stresses reduce inflation, they do so at a higher cost of unemployment, making them a less-than-ideal substitute for tighter monetary policy.”