The Broken Phillips Curve

On today’s show we are talking about the fallout of Chairman Powell’s testimony to the House Financial Services Committee on Wednesday and the corresponding Senate committee on Tuesday.

In his remarks, he reiterated that the Fed sees raising rates further in response to the unexpectedly strong employment, GDP and inflation numbers.

On Tuesday, he said the central bank would consider raising the federal funds rate by a half-percentage-point later this month, leading investors to anticipate the larger rate rise.

All of this analysis is based on the famous Phillips Curve that forms the basis of so much of Fed policy. Every time the Phillips curve is shown to have fundamental flaws, they tweak the model to try and take some new factor into account. But the same fundamental flaws exist. The basic premise that a tight labor market automatically puts too much negotiating power in the hands of employees is at the core of the financial model. But if we go back through history there is example after example where a tight labor market did not result in inflation. The conclusions drawn by Fed officials using the Phillips curve each and every time has been shown to be incorrect.

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Host: Victor Menasce

email: podcast@victorjm.com