Under Ms. Yellen’s leadership, the preemption of inflation based on the Phillips curve has become the lodestar of monetary policy. Accordingly, last week’s Fed statement, while allowing that inflation ‘is expected to remain somewhat below 2 percent in the near term,’ reaffirms the view that it will ‘stabilize around the Committee’s 2 percent objective over the medium term.’
The Phillips curve is a graphical representation of the ostensible inverse relationship between inflation and unemployment, implying that it should be downward-sloping. Yet, following the post-recession rebound in inflation in 2009, as Chart 1 shows, the relationship between the unemployment rate (horizontal axis) and the PCE inflation measure favored by the Fed (vertical axis) has been nothing of the sort.
This post was published at Zero Hedge on Jul 31, 2017.