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The Great Moderation has ended with covid-19

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Academics Jim Stock and Mark Watson coined the term “Great Moderation” in 2002 to describe the period of steadily lower volatility in inflation and activity. The Great Moderation, since the mid-1980s until 2019 before the Covid-19 pandemic struck, was a remarkable period of stability of both growth and inflation. We were in a demand-driven economy with steadily growing supply.  

Since the mid-1980s, steadily expanding production capacity and demand shocks were key features of the Great Moderation. Exuberance and borrowing binges drove overheating, while souring sentiment and collapsing spending drove recessions. Central banks could mitigate both by raising or cutting rates. The policy response did not involve trade-offs; there was no conflict between stabilizing both. This helped spark a bull market in both bonds and equities. This is no more, in our view. The chart shows the regime of subdued inflation and output volatility is over.

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