The Fed, the Phillips Curve and Full Employment
By Herb W. Morgan, III, Efficient Market Advisors
The United States economy and macro-economic science are evolving to a critical point that seems destined to change how monetary policy makers view their role and execute on their mandates. At the center of it all is the Phillips curve. The Phillips curve, which has fairly accurately predicted the relationship between employment and prices is on its way out as a policy tool, thanks to the longest economic expansion in U.S. history. This expansion now boasts the tightest labor market on record without the higher inflation called for by the Phillips curve.
The Phillips curve comes from W.H. Phillips’ study of the correlation of employment and inflation, which studied data in the U.K. from 1861 to 1957. The work was a major milestone for the dismal science. While widely accepted as a powerful policy tool, it has been challenged over the years by the likes of Milton Friedman and others. Today, the U.S. jobs expansion which has produced positive results since Q4-2010, is providing a hard data challenge to long established orthodoxy. Unemployment has plummeted by every conceivable measurement. Job openings in the U.S. far exceed the number of unemployed, yet the expansion continues without any measurable amount of systemic inflation.. Continue Reading Here