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Covid Shock And The Fed

David Kotok profile picture
David Kotok


  • There are all sorts of warnings and forecasts of inflation spikes coming from the collective punditry.
  • The "shadow" unemployment rate estimates are much closer to COVID reality than are the traditional BLS estimates.
  • Current GDP recovery is being driven by Covid lockdown forced productivity gains achieved through technological innovation instead of by adding people to the labor force.

We created the chart below to depict an "underdamped oscillatory system." Hat tip, Dr. Thomas Synnott III.

Ppersonal Consumption Expenditures (PCE) vs. U-3 Unemployment Chart

We've included a half-century of Phillips curve data for personal consumption expenditures (PCE) vs. U-3 unemployment, color-coded by the person who was Federal Reserve chair at the time. That way, you can see a year-by-year history for all Fed chairs since William McChesney Martin. We're using the PCE to describe inflation, since it is the Fed's preferred inflation measure. We're using the traditional unemployment rate (U-3) since the Fed refers to it in their forecasts.

The horizontal orange line that links year 2019 (19) to year 2020 (20) depicts the effect of the COVID shock of last year, when U-3 unemployment more than doubled from under 4% to greater than 8%. As you can see, there has been nothing in modern history like this sudden surge. The violence of the shock is greater and more abrupt than in any of the crises in the entire time period depicted.

Our point is to support what we are hearing from Fed Chair Jay Powell. This is on his watch, and the challenge for the Fed is monumental.

There are all sorts of warnings and forecasts of inflation spikes coming from the collective punditry. They may ultimately be correct, but is an immediate inflation spike on the horizon? We don't think so. A temporary rebound is not an inflation shock that triggers a permanent trajectory shift in the price level. So, for now, we view this economic recovery as coming from a "hundred-year-flood" type of shock.

Note that the shock you see depicted does not include the imminent substantial demographic shift of nearly a million dead Americans in excess of "normal" numbers. Nor does it show the global shock from "excess" deaths in nearly every other country. It also does not show

This article was written by

David Kotok profile picture
David Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. David’s articles and financial market commentaries have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to Bloomberg TV and Bloomberg Radio, Yahoo Finance TV, and other media. He has authored or co-authored four books, including the second edition of From Bear to Bull with ETFs and Adventures in Muniland. He holds a B.S. in economics from The Wharton School of the University of Pennsylvania, an M.S. in organizational dynamics from The School of Arts and Sciences at the University of Pennsylvania, and an M.A. in philosophy from the University of Pennsylvania.David has served as Program Chairman and currently serves as a Director of the Global Interdependence Center (GIC), www.interdependence.org, whose mission is to encourage the expansion of global dialogue and free trade in order to improve cooperation and understanding among nation states, with the goal of reducing international conflicts and improving worldwide living standards. David chaired its Central Banking Series and organized a five-continent dialogue held in Cape Town, Hong Kong, Hanoi, Milan, Paris, Philadelphia, Prague, Rome, Santiago, Shanghai, Singapore, Tallinn, and Zambia (Livingstone). He has received the Global Citizen Award from GIC for his efforts. David is a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), has served on the Research Advisory Board of BCA Research and is currently on the advisory board of RiskBridge Advisors. He has also served as a Commissioner of the Delaware River Port Authority (DRPA) and on the Treasury Transition Teams for New Jersey Governors Kean and Whitman. Additionally, he has served as a board member of the New Jersey Economic Development Authority and as Chairman of the New Jersey Casino Reinvestment Development Authority.

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