Phillips Curve & Political Tightening

by Chris Black

When judging policy, Fed officials pay attention to what’s called the Phillips Curve, which plots inflation as an inversely correlated function of unemployment (higher inflation = higher employment, and vice-versa).

 The Phillips Curve would imply that the Fed cannot effectively reduce inflation (through rate hikes, etc.) absent a rise in unemployment. 

This is also why the Fed admits that it fears sticky (persistent) inflation with high unemployment. 

The Fed has a dual mandate (www.stlouisfed.org/in-plain-english/the-fed-and-the-dual-mandate), which is to balance price stability with maximum employment. 

When employment data comes in higher than expected, like it did for April, it signals to the Fed that the inflation fight is going in the wrong direction. 

The Fed believes in the Phillips Curve, which becomes a problem when the real number (inflation, employment) inconveniences the optics of the Biden admin.

We are primarily funded by readers. Please subscribe and donate to support us!

In late January, UBS published a note calling out Biden & the BLS for outright deceiving the Fed and rendering non-farm payroll numbers (jobs reports) “totally unreliable.”

 It’s no secret that this is going on — remember the quiet revisions made in December?

Arguably, inflation “shocked” Main Street in 2022 because Biden officials had adjusted the CPI downwards (www.bls.gov/cpi/notices/2021/seasonal-adjustment.htm) to ease political pressure, leading the Fed to begin tightening way too late and for inflation to get as out-of-hand as it did last year.

 Is unemployment going to be the “shocker” of 2023 or 2024, as the Fed over-tightens? 

This is partly what UBS warns of.

They end with lamenting that, while everybody in the room knows the numbers are cooked, they will not see a correction until next February at least: 

“Unfortunately, what we, the BLS, and the Philly Fed staff see as overstatement in 2022, will not be corrected until February 2024.”

Views:

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.