Interesting Business, Econ and Finance Links

quote:

---

With regard to the employment side of our mandate, our revised statement emphasizes that maximum employment is a broad-based and inclusive goal. This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities.23 In addition, our revised statement says that our policy decision will be informed by our "assessments of the shortfalls of employment from its maximum level" rather than by "deviations from its maximum level" as in our previous statement.24 This change may appear subtle, but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation.

In earlier decades when the Phillips curve was steeper, inflation tended to rise noticeably in response to a strengthening labor market. It was sometimes appropriate for the Fed to tighten monetary policy as employment rose toward its estimated maximum level in order to stave off an unwelcome rise in inflation. The change to "shortfalls" clarifies that, going forward, employment can run at or above real-time estimates of its maximum level without causing concern, unless accompanied by signs of unwanted increases in inflation or the emergence of other risks that could impede the attainment of our goals.25 Of course, when employment is below its maximum level, as is clearly the case now, we will actively seek to minimize that shortfall by using our tools to support economic growth and job creation.

We have also made important changes with regard to the price-stability side of our mandate. Our longer-run goal continues to be an inflation rate of 2 percent. Our statement emphasizes that our actions to achieve both sides of our dual mandate will be most effective if longer-term inflation expectations remain well anchored at 2 percent. However, if inflation runs below 2 percent following economic downturns but never moves above 2 percent even when the economy is strong, then, over time, inflation will average less than 2 percent. Households and businesses will come to expect this result, meaning that inflation expectations would tend to move below our inflation goal and pull realized inflation down. To prevent this outcome and the adverse dynamics that could ensue, our new statement indicates that we will seek to achieve inflation that averages 2 percent over time. Therefore, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.

---

quote:

---

The historically strong labour market did not trigger a significant rise in inflation. Over the years, forecasts from FOMC participants and private-sector analysts routinely showed a return to 2 percent inflation, but these forecasts were never realized on a sustained basis. Inflation forecasts are typically predicated on estimates of the natural rate of unemployment, or “u-star,” and of how much upward pressure on inflation arises when the unemployment rate falls relative to u-star. As the unemployment rate moved lower and inflation remained muted, estimates of u-star were revised down. For example, the median estimate from FOMC participants declined from 5.5 percent in 2012 to 4.1 percent at present.

---

quote:

---

The long-held view that you cannot have a tight labour market without wage growth outstripping productivity growth — inflating prices in the process — is often expressed by the Phillips Curve.

---

quote:

---

The Phillips Curve matters because it feeds into policymaking, leading central bankers, for instance, to prematurely hike rates in the expectation that inflation will soon surge on the back of the labour market’s strength.

Indeed another Fed policymaker Lael Brainard has acknowledged that the rate hikes the central bank made in the years leading up to the pandemic were missteps. The abandonment of the curve has helped drive Powell’s view that it should shoot for an average inflation rate of 2 per cent, rather than targeting a rate of 2 per cent in the medium term regardless of whether prices were lower in the preceding years.

What that means in terms of monetary policy in the years ahead is that rates will stay lower for longer, even if unemployment falls back to where it was pre-pandemic.

---