Stanford University
Stanford, California
July 16, 2026

Navigating Economic Shocks:
A Monetary Policymaker’s Perspective

Philip N. Jefferson
Vice Chair, Federal Reserve Board

Board of Governors of the 
Federal Reserve System

The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

Road Map of Talk

• Classifying Shocks
• Responding to Shocks in Real-Time
• Challenges Posed by the Current Juncture
• Current Stance of Monetary Policy

Classifying Shocks

Demand Shocks 

• Immediately affect household consumption, business investment, government expenditure, or exports 
• No direct effect on potential output

Supply Shocks 

• Immediately affect production processes and the structure of markets 
• Change potential output

The Output Gap

Output Gap = Actual Output (GDP) – Potential Output

Positive output gap (excess demand)  

• Employment tends to lie above its maximum sustainable level
• Upward pressure on inflation

Negative output gap  (excess supply)  

• Employment tends to lie below its maximum sustainable level
• Downward pressure on inflation

The Fed's Mandate

Dual Mandate – Maximum employment and stable prices

Response to shocks depends on both sides of the mandate

• Employment and inflation moved in the same direction
  • Objectives aligned
  • Policy actions can support both
• Employment and inflation moved in opposite directions
  • Objectives in tension
  • Policy actions depend on risks to each side of the mandate

Figure 1: Oil Prices and the Middle East Conflict

Figure 2: Oil Intensity of U.S. GDP

Figure 3: Inflation and Unemployment (left panel)

Figure 3: Inflation and Unemployment (right panel)

Figure 4: Artificial Intelligence - Rising Uptake

Figure 5: Artificial Intelligence - Investment Boom

Figure 6: Federal Funds