In Other Words, They Haven’t Got a Clue

I so wanted to add the F-word to the title, but this is family show blog. With new monetary policy approach, Fed lays Phillips curve to rest.

This probably also means that whatever they do next will also be a guess, but let’s get to that Phillips Curve.

Federal Reserve policymakers watched as the U.S. unemployment rate fell lower and lower and waited for the jump in inflation typically associated with such a tight labor market.

The expectations were based on a rule that has shaped decades of monetary policy decisions: the Phillips curve, or the concept that inflation tends to rise when the unemployment rate falls, and vice versa.

But the inflation that Fed officials anticipated never arrived, and in a monumental speech delivered on Thursday, Fed Chair Jerome Powell announced that the U.S. central bank’s policymakers are done waiting.

So it turns out that the “rule” of the relationship between inflation and low unemployment isn’t really a rule. See the video below.

I could include a definition of the Phillips Curve and talk about how the history of the Pound Sterling from 1861–1957 describes a currency very different from the fiat currency known as the US dollar in the 21st Century. I could talk about the lack of complexity in the model itself, but you can find all of that if you’re interested. I’m not an economist, and that is not the point of this post.

One of the rules that economists have relied on for a long time, is shown to be wrong. So. What does that say about the entire discipline? What else is wrong? And if the “rules” that they relying upon are just wrong, why are they in charge of the money? What flavor of “The Divine Right of Kings” makes them the right group of people to manage the money supply. Sounds like a lot of guesswork with some mathematical justification applied as a veneer.

The video is about when rules, are not really rules.