Laughable FOMC Statements on Phillips Curve, Inflation Expectations

The Jan 30-31 FOMC minutes were published today. In addition to the usual drivel came laughable Phillips Curve nonsense.

The Fed released its January 30-31 FOMC Meeting Minutes today.

The minutes were a combination of the usual drivel about the economy plus some downright laughable comments on the Phillips Curve and inflation expectations.Let's start with the drivel.

Economic Drivel

In their discussion of the economic situation and the outlook, meeting participants agreed that information received since the FOMC met in December indicated that the labor market continued to strengthen and that economic activity expanded at a solid rate. Gains in employment, household spending, and business fixed investment were solid, and the unemployment rate stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy continued to run below 2 percent. Market-based measures of inflation compensation increased in recent months but remained low; survey-based measures of longer-term inflation expectations were little changed, on balance.

Almost all participants continued to anticipate that inflation would move up to the Committee's 2 percent objective over the medium term as economic growth remained above trend and the labor market stayed strong; several commented that recent developments had increased their confidence in the outlook for further progress toward the Committee's 2 percent inflation objective. A couple noted that a step-up in the pace of economic growth could tighten labor market conditions even more than they currently anticipated, posing risks to inflation and financial stability associated with substantially overshooting full employment.

However, some participants saw an appreciable risk that inflation would continue to fall short of the Committee's objective. These participants saw little solid evidence that the strength of economic activity and the labor market was showing through to significant wage or inflation pressures. They judged that the Committee could afford to be patient in deciding whether to increase the target range for the federal funds rate in order to support further strengthening of the labor market and allow participants to assess whether incoming information on inflation showed that it was solidly on a track toward the Committee's objective.

Bond Market Reaction

There was nothing new in that drivel, at least nothing substantial.

Nonetheless, the bond market reacted as if more rate hikes are baked in the cake.

The laughable nonsense followed the staff presentations, when participants discussed inflation frameworks.

Four Laughable Statements

  1. Almost all participants who commented agreed that a Phillips curve-type of inflation framework remained useful as one of their tools for understanding inflation dynamics and informing their decisions on monetary policy.
  2. Participants generally agreed that inflation expectations played a fundamental role in understanding and forecasting inflation, with stable inflation expectations providing an important anchor for the rate of inflation over the longer run.
  3. They commented that various proxies for inflation expectations--readings from household and business surveys or from economic forecasters, estimates derived from market prices, or estimated trends--were imperfect measures of actual inflation expectations, which are unobservable.
  4. A few saw low levels of inflation over recent years as reflecting, in part, slippage in longer-run inflation expectations below the Committee's 2 percent objective.

Phillips Curve Nonsense

The Phillips Curve, an economic model developed by A. W. Phillips, purports that inflation and unemployment have a stable and inverse relationship.

In short, falling unemployment will lead to a rise in inflation.

The lead-in chart, courtesy of Pater Tenebrarum at the Acting Man Blog, shows the Phillips Curve is nonsense.

Occasionally, Fed researchers come up with the correct answer, although in this case the answer was obvious.

Yet, "almost all" the Fed participants still believe in such silliness.

Inflation Expectations Nonsense

It's interesting how the Fed correctly notes inflation expectations cannot be measured, yet the Fed still clings to the expectations model.

The kicker is that even if someone could measure expectations, the measurement would be useless.

What people expect is meaningless unless they act in a predictable, meaningful way based on those expectations!

They don't and won't.

The idea that inflation expectations matter is ridiculous, except in cases of extremely high inflation or hyperinflation.

​In Venezuela, people will spend every cent they get as fast as they get it, assuming, of course, that there is anything to buy.

In every other case, consumers' price expectations is meaningless.

No one will buy an extra toaster or coat they do not need. There is only so much food one can store, even with a freezer. A car holds precisely one tank of gas. Consumers will not rent another house or have a second appendectomy just because they expect prices to rise.

The Fed may as well ask consumers if the man in the moon looks more like Putin, ZeroHedge, or me. The answer would be equally meaningful.

Yet, the Fed places great faith in such nonsense even thought it cannot measure expectations in the first place!

Curiously, the stock market is one place were expectations do matter. People will bid up stocks if they think prices will rise. This is how the Fed fuels bubbles.

Stupidity Well Anchored

Inflation expectations may or may not be well anchored, but stupidity sure is.

Brandolini’s Law

​Keynes thought inflation and recession could not happen at the same time. Yet, people still cling to Keynesian nonsense. This leads to:

Bubbles Everywhere

As a direct result of the Fed's total incompetence in understanding inflation, bubbles are readily apparent in equities, in junk bonds, and in Bitcoin speculation.

No Economic Benefit to Inflation

BIS Deflation Study

The BIS did a historical study and found routine price deflation was not any problem at all.

Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

​CPI or PCE deflation is not to be feared.

More precisely, price deflation is a benefit. Falling prices increase purchasing power by definition and thus raise standards of living.

​It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.

Deflation Around the Bend

​Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.

This is precisely why the Fed's expectation of lasting higher inflation is dead wrong.

Deflation is right around the bend.

Mike "Mish" Shedlock

Comments (12)
No. 1-12
Realist
Realist

Wages are going nowhere. Price deflation is the only hope consumers have. Most price deflation is a result of technological advances. Human ingenuity at its best.

sachvik
sachvik

The Fed was established with a dual mandate. Let's not debate whether it can fulfill it or not but the fact is that it will do its best to meet at least one of its mandates - the 2% inflation rate - which it regards as holy doctrine! Don't see why any of the Fed governors would change their view and spot bubbles. Their job depends on hitting the 2% target, not on pricking bubbles...

lol
lol

big gov't borrowed a quarter trillion dollars IN ONE DAY!!!LOL,close to half a trillion in ONE WEEK!!!

FelixMish
FelixMish

Just eyeballing that graph it looks like CPI drives unemployment after a bit of lag. 3rd factor involved?

Stuki
Stuki

If you look at any two, long enough, series, A and B, of random events, there are periods in which A “drives” B “after a bit of lag.” And vice versa. And periods where A “drives” itself with a lag. As well as any other conceivable relationship between the two.

Which is good thing for today’s so called “economists,” since ferreting out yet another such “important” relationship, is what most Pd.Ds are made of.

It’s also a good thing for banksters, finance hacks and today’s “investors,” as demonstrating that a flattering relationship between A & B happened at some point, is what causes the saps to think the salesman they talk to is “smart,” so they should open their wallet.

And finally, it’s also a good thing for politicians. As it allows high falutin sounding statistimecal language to be used to describe whatever relationship currently favor the political class. Hence reaffirms, in the (lack of…) mind of the drones, that they should shut up and feel all warm and happy inside, that the “experts,” who The Man on TeeVee says are “data driven,” are making such wise choices for them.