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Let us talk about the #FED #FOMC's 1st #MonetaryPolicy meeting of 2020. Specifically, let us talk about the puzzle that is a flatter #PhillipsCurve...

The #FederalOpenMarketCommittee (#FOMC) of the #FederalReserveBank (#FED) of the #US concluded its 1st meeting of 2020 on the 29th January 2020. As expected, the FED did not change rates but left the #KeyPolicyRate, the #FederalFundsRate (#FFR) in the 1.5%-1.75% range...

Indeed, if one considers the #FED #Dotplot of December 2019, the decision to keep rates unchanged would not come as a surprise. What I wanted to focus on today is some key passages in the statement, highlighted in yellow in the screenshot below...its all #PhillipsCurve...

From the Jan. 2020 #FED #FOMC #MonetaryPolicy statement, one can underscore that altough #Unemployment is low (job creation vibrant), #Inflation appears not to be picking up in the #US. It remains well below the FED's 2% target...this is certainly counter to #Economic #Theory...

The #Theory being referred to here is the #PhillipsCurve argument that posits that when #Economic activity & #demand are high relative to the economy’s capacity to produce goods & services (#supply), the attendant pressure on resources will tend to drive up #wages & #prices...

A #Chart I particularly like in this respect, to explain the #PhillipsCurve #puzzle currently prevailing in the #US is attached below. The chart shows the #unemployment & #inflation relationship in the US from 1961Q1 to 2019Q2...

From the chart, the orange line shows the #Unemployment gap while the green reflects the #Inflation rate. Simply put, what we expect to see (given theory) is: high #unemployment gap coinciding with lower #inflation reading. The opposite should be true given lower unemployment...

Students of #Economics know what 1970s mean for the #PhillipsCurve (i.e. #Stagflation) so I wont get too much into that. What I will want to highlight is that, post 2007/08 #FinancialCrisis, Phillips Curve relationship brought in a puzzle as high employment didnt spur inflation..

The problem here is that, #Economic agents & #Policy makers rely on #StylisedFacts to help understand the likely implications of deliberate policy actions. In the case of #employment & #inflation, stylised facts are usually underpinned by the #PhillipsCurve argument...

This is to say, one would expect, on the basis of the #PhillipsCurve argument that, if #employment is high, #inflation in the future can be expected to be high. Therefore, #contracts, #trades, future #policy actions etc are made on the back of this expectation...

It therefore goes without saying that if what was once considered a #StylisedFact is now brought into question, expectations of #EconomicAgents are thrown into a tailspin. If the #PhillipsCurve is broken, what will we do? Better yet, why is it broken?

This brings us to a very interesting take on the relationship between #Inflation & #Employment. As you have seen from the Jan #FED #FOMC statement, inflation is not picking up despite employment being robust. WHY???

Various rationale have been advanced by #Economists as to why the #PhillipsCurve relationship appears to have broken down in the US (and indeed in the EU as well). These range from:

1. Inflation expectations anchored at a lower level.
2. Globalisation / financial interconnections could mean more factors than just domestic affect US inflation.
3. Changes in labour markets (declining unionisation, fall in minimum wages).
4. Changes in measure of inflation.

At this point, it almost reads like the pundits are clutching at straws and appear not to really know why the #PhillipsCurve relationship has broken down in the #US. Hmm!! Could it be!? World renowned #Economists have NO IDEA WHAT IS HAPPENING? It wouldn't be the first time...