"I've been framed!" The Phillip's Curve pleads innocent. (Thread.)
I know what you're thinking: I'm supposed to be dead, or at least to be on death row, having been found guilty of causing the Fed to repeatedly over-tighten over the years.
I know what you're thinking: I'm supposed to be dead, or at least to be on death row, having been found guilty of causing the Fed to repeatedly over-tighten over the years.
But I've never had a chance to defend myself. And I think I deserve that much. I mean, its my 6th amendment right! And although I know I look guilty, I'm telling you, you've rushed to judgement.
I know I'm easy to suspect. After all, I've been guilty in the past. And I'm not especially respectable, let alone reliable. I'm also managed to alienate pretty much everyone-- first Monetarists and Austrians None thinks of me as at all upright. cato.org/publications/c…
And now Keynesians and MMTs. They either think I'm so far from being upright that I'm actually flat, or they threaten to flatten me themselves! bilbo.economicoutlook.net/blog/?p=44651&…
But as for the specific crime I'm charged with, I'm telling you it wasn't me. It's not that I had an alibi--I _could have_ been the culprit. My defense is that the Fed might have done what it did even if I'd been hiding out on the moon.
You ask for evidence? I give you exhibit A. The blue line shows the 5 year breakeven inflation forecast since Jan. 2012. As you can see, its mostly above the Fed's 2-percent target. Red line is FFR upper limit; green = unemployment (right scale).
Most of the Fed's policy-rate adjustments seem consistent with changes to the market's inflation rate expectations. That is, it might have made them by looking at those only, with no help from me. The December 2015 "lift off" hike is the only one that can't be explained that way.
So was that my fault? Again I say, "Not guilty!" That hike wasn't mostly, let alone entirely, a response to the prevailing unemployment rate which, at 5%, wasn't all that low. Instead, It was the Fed's way of launching its vaunted "normalization" plan. federalreserve.gov/monetarypolicy…
That plan called for the Fed to take "steps to raise the federal funds rate and other short-term interest rates to more normal levels" where the "normal" level was to be determined by the FOMC.
Back then the prevailing view, based on various estimates, was "that the longer-run trend rate is in the range of 2.5 to 3.5 percent in nominal terms." The Fed was intent on moving the actual FFR toward that level. federalreserve.gov/newsevents/spe…
It had to do SOMETHING after all, to show that it was serious about its normalization plan. It was at this time not shrinking its balance sheet at all.
I swear, I played no important part in the Fed's decision to start hiking rates. That decision was based entirely on the FOMC's long-run estimates of the "normal" fed funds rate, and its commitment to normalize the actual rate. For once, I was innocent!
So have mercy on me, please! I promise to reform. If I can't quite be upright, I'll be as flat as a pancake! I'll even slope up, if you insist. I'll do anything you ask--just get that darn noose off of me!
