Central banks cannot control wars, experts warn: Interest rate hikes neither produce oil nor unblock shipping routes

Whenever the situation in the Middle East becomes turbulent and oil prices rise, concerns about central bank interest rate hikes follow closely behind. However, recently economist Alexander Salter issued a warning in an analysis article published on TheDailyEconomy.org: when the roots of inflation lie in geopolitical conflicts and supply disruptions, monetary policy is essentially powerless, and aggressive tightening of policies not only fails to resolve energy shortages but may also transform an external supply shock into a domestic demand recession, exacerbating the economy. Salter pointed out that regardless of the interest rate decisions in the United States, Europe, or the United Kingdom, they cannot produce an extra barrel of oil from the Persian Gulf, nor can they reopen blocked trade routes. In the face of supply-driven inflation, the real role of central banks is to prevent panic in financial markets from spreading to credit markets, avoiding the economy from slipping into a self-reinforcing downward spiral—rather than attempting to "defeat" a war by suppressing demand. This judgment has direct implications for investors. If central banks misjudge the situation and aggressively raise interest rates during a supply shock, the market will face a double blow: it will have to bear the cost pressure from rising energy prices while also dealing with job declines and investment shrinkage triggered by monetary tightening. Salter warned that the worst outcome of policy missteps is that—before the inflationary pressures driven by war have naturally dissipated, central banks push the economy into a deeper recession. The nature of supply shocks and demand shocks is different; the same policy tool cannot be universally applied Salter's argument begins with the classic framework in macroeconomics that distinguishes between "demand-driven inflation" and "supply-driven inflation." When inflation stems from excessive demand—too much money chasing too few goods—there is ample justification for central bank intervention; tightening policies can cool overheated consumption and investment without causing long-term economic harm. However, the oil shock caused by war is fundamentally different in nature. A tightening of energy supply or a sharp rise in transportation costs means that the overall economy becomes poorer and productivity declines. This is a real loss that an economy must digest after enduring external shocks, not an illusion that monetary policy can eliminate. Salter believes that attempting to fully offset this reality with monetary tightening may lead to worse outcomes: on top of already high prices, output declines and unemployment rises. The cost of aggressive interest rate hikes: unemployment is harder to bear than inflation Salter acknowledges that the pain brought about by rising energy prices due to war is unavoidable—households will pay more at the gas station, and businesses will face higher costs. However, he believes that aggressive tightening of policies by central banks will transform this external shock into a collapse of domestic demand, with potentially more severe consequences. His judgment is specific and direct: for the vast majority of workers, keeping their jobs in a 4% inflation environment is far more acceptable than being unemployed in a 2% inflation environment. Slowing down monetary growth and raising interest rate targets do not solve the fundamental supply shortages; they merely redistribute the burden—and often shift it onto workers. In this scenario, raising interest rates essentially trades job losses for a decrease in an inflation figure that the central bank is already powerless to eliminate, which is not worth the cost The Correct Role of Central Banks: Guarding the Demand Side and Preventing Second-Order Effects Since it is impossible to "defeat" supply shocks, what should central banks do? Salter provides a clear functional positioning. During geopolitical crises, the most effective stage for monetary authorities lies in stabilizing the demand side. Specifically: when financial pressure indicators signal distress, central banks can provide liquidity to the market to prevent financial pressures from amplifying shocks; they can assure the market that the banking system and capital markets will operate normally; and they can prevent widespread collapse of investment and employment through regular open market operations. Salter emphasizes that the real danger is not the first wave of rising energy prices, but rather frightened investors, tightening credit conditions, or collapsing market confidence, which trigger a self-reinforcing economic downturn. The task of the central bank is to prevent these "second-order effects," rather than confront the "first-order shocks" that it cannot change. Credibility Comes from Accurate Judgments, Not Mechanical Responses to Every Price Increase Salter anticipates questions from critics: Will tolerating temporary high inflation not lead to unanchored inflation expectations and damage the credibility of the central bank? His response is that credibility is not built through mechanical responses to every price increase, but rather accumulated through accurate judgments and appropriate responses to the sources of inflation. If the public understands that the central bank can distinguish between supply shocks and demand shocks, credibility is actually maintained. Salter believes that, as long as inflation expectations remain anchored, the optimal strategy is often to "ride out" the initial inflation impulse—tolerating temporarily elevated overall inflation while clearly communicating to the market the externality and temporariness of the shock. He explicitly states that central bank officials should candidly inform the public: the price surge is a result of geopolitical events, beyond the control of monetary policy—the Federal Reserve cannot drill for oil or end wars. The worst policy mistake, Salter concludes, is to act hastily out of impatience: aggressively tightening before the inflation pressures driven by war have begun to dissipate on their own, deepening the economic downturn and turning avoidable losses into reality. The fact that war makes society poorer is unavoidable; the best outcome that monetary policy can achieve is to ensure that the costs of economic adjustment are not higher than necessary