Monetary policy operates with a 12-18 month lag, whereas the inflationary effects of oil shocks are immediate and front-loaded. By the time interest rate changes impact the economy, the initial inflationary pressure from oil has passed, making a policy response ineffective and potentially harmful.

Recent inflation was primarily driven by fiscal spending, not the bank-lending credit booms of the 1970s. The Fed’s main tool—raising interest rates—is designed to curb bank lending. This creates a mismatch where the Fed is slowing the private sector to counteract a problem created by the public sector.

Current central banking models are designed for demand management (neo-Keynesianism) and are ineffective against structural supply shocks like the Hormuz crisis. Institutions like the Fed lack the tools and intellectual framework to respond appropriately, like 'a fish understanding a bicycle'.

The Fed's struggle with inflation is less about domestic demand and more a direct result of administration policies. Geopolitical actions affecting oil prices and tariffs are creating supply-side shocks that push inflation higher, creating tension between the White House and the Fed.

During an energy supply shock, central banks are trapped. Hiking rates doesn't increase oil supply and often causes a recession, leading to a policy reversal within a year. Conversely, stimulating the economy fuels demand into a supply-constrained market, worsening inflation. There is no easy path forward.

The Federal Reserve is in a 'pickle,' using interest rate hikes—a tool that curbs demand—to fight inflation that is largely driven by supply-side factors like energy costs and supply chain disruptions. This approach may not effectively address the root causes of rising prices and primarily impacts already soft, interest-rate-sensitive sectors of the economy.

Wars, particularly in the Middle East, don't directly cause higher interest rates. Instead, they disrupt energy supplies like oil, leading to widespread inflation. This inflation then forces central banks to raise interest rates to cool the economy, creating a clear causal chain.

Policymakers, scarred by post-COVID inflation, risk tightening monetary policy excessively in response to energy price surges. History suggests these shocks are temporary and primarily affect headline, not core, inflation. The greater danger is stifling economic growth by overreacting to a transient inflationary impulse.

An oil supply shock initially appears hawkishly inflationary, prompting central banks to hold or raise rates. However, once prices cross a critical threshold (e.g., >$100/barrel), it triggers severe demand destruction and recession, forcing a rapid policy reversal towards aggressive rate cuts.