Though the Federal Reserve has signaled there’s no evidence that full employment triggers inflation, it’ll be the markets that’ll decide if the so-called Phillips Curve is bent for good, former hedge fund manager turned reporter Ron Insana says.
In an opinion piece for CNBC, Insana wrote that Fed chairman Jerome Powell's speech on a new approach to inflation essentially declared the end of a long-held theory on the relationship between jobs and inflation.
The Phillips Curve, named after economist William Phillips, states there’s an inverse relationship between low unemployment and high inflation, Insana noted — and it’s mostly held up since 1861.
But Phillips’ measurements were assessing a relationship “in an entirely closed economic system that also was home to the introduction of labor unions and other factors that drove both wages and prices higher as unemployment declined,” Insana wrote.
“Since that time, unions have been broken, for all intents and purposes, the economy has been globalized, bringing down both the cost of labor and the cost of goods and services,” he wrote.
“Further, technological innovation has driven down the price of many goods, while simultaneously raising their quality, also pushing general prices lower still.”
Now, as the “Fed gives up on the Phillips Curve,” there’s a new question: Should it again be “more, rather than less, vigilant about incipient inflation?” Insana asks.
“The answer, as always, will be found in the message of the markets,” he wrote. “Right now, the message favors the Fed’s historic policy change.
“But that’s now … bond yields, gold, silver and Treasury Inflation-Protected Securities may be telling an emergent tale that is not what other markets currently expect.”
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