Distinguished guests, ladies, and gentlemen. It’s an honor to be here. I want to thank the China Development Forum for inviting me to speak today.
We meet at a time of unrelenting change. The forces reshaping the global economy—in trade, geopolitics, technology, and demographics—are moving faster than at any point in recent history.
However, as recent weeks have shown, this era of rapid change has also been an era of more frequent shocks. And although I had planned to speak today more about change than shocks—and in particular about the historic and rapid rise of China in the global economy—let me first offer some thoughts on recent developments in the Middle East.
The conflict in the Middle East has introduced a significant new source of risk into the global economy, that until recently, had looked reasonably resilient.
The full consequences are still difficult to assess, but we expect these developments to pose complicated trade-offs for policymakers.
Of course, the first line of defense against supply disruptions is prices. Demand should be allowed to adjust to a certain degree to ensure that the marginal uses of energy are the most productive ones.
But understandably, fiscal policy might need to play a role in adjusting to the energy shock. Governments may try to protect households with energy caps and subsidy schemes. This may cushion cost of living pressures in the short run, but these measures are fiscally costly at a time when many government budgets are stretched. And because they suppress price signals, they often prevent an orderly reduction in energy usage and may keep overall energy prices—and demand generally—elevated for longer.
For central banks, the policy environment is particularly challenging. If energy prices remain higher for longer, central banks may have to balance risks to price stability against a downturn in the economy and a potential tightening of financial conditions. Former U.S. President Teddy Roosevelt once said that in moments of decision, the “worst thing you can do is nothing.” While this logic might have applied to the combat or high-stakes political situations for which President Roosevelt is famous, it does not apply to central banks facing an energy shock.
Doing nothing is perfectly logical if it is the best available alternative, and for central banks in the current moment, there is very high option value to waiting for now. Central banks with less firmly anchored inflation expectations and that have been struggling with persistently high inflation may need to respond faster. But central banks that were on hold or in the process of gradually adjusting policy can likely afford to take their time and receive additional clarity about the rapidly evolving situation before deciding whether a pivot—either toward a more restrictive stance to address inflation risks or a more accommodative stance to address output risks—is warranted.
Critically, all central banks should articulate their potential reaction functions, including with scenario analysis, to sensitize the market to potential policy paths should risks to inflation and output materialize.
Of course, it is early days, and much could change. But what is clear is that policymakers and businesses alike will need to adapt, underscoring a lesson successive shocks have taught us: that robust policy frameworks and agility are essential. Recent experience has also shown that allowing the private sector to adapt and innovate in response to shocks can enhance the overall resilience of the economy.
READ MORE: https://www.imf.org/en/news/articles/2026/03/21/sp032226-chinas-new-chapter-rebalancing-and-unleashing-market-forces
