Tim Duy tries, unsuccessfully, to justify the Fed’s tightening bias:
…The Fed can always fall back on the unemployment rate to claim that although inflation is low now, it will creep back up to its 2 percent target with the economy operating at full employment. The minutes of the July FOMC meeting made clear that central bankers remain committed to this Phillips curve framework. Although persistently low wage growth calls that claim into question, the Fed has good reason to believe wage growth will soon accelerate.
To understand why, note that there is no single wage measure. We have a number of different compensation metrics. Obviously, using the “best” or “right” measure would be optimal, but in the absence of such knowledge, I created a composite based on the average of some common compensation measures.
With this measure I created a Phillips curve for wages. You can see that the current spot on the curve is an outlier:
The Fed’s relative confidence that the economy is operating at full employment is not unreasonable. If recent data are historical outliers, then wage growth will jump sharply higher — and probably soon if unemployment keeps pushing lower.
Tim Duy puts too much emphasis on the latest “spot” being an outlier. However, if you do a more detailed analysis you find that’s not the case.
The charts below illustrate.
It is clear that post crisis, the Wage Phillips Curve not just flattened, it became flat. You see that the current (2017.II) is only an “outlier” if you think the data generating process has remained stable, which it clearly hasn’t.
The “outlier”, if there is one is the 2008.IV spot. It occurs during the transition from the “steep” to the “flat” Wage Phillips Curve. At that time unemployment was rising fast, but wage stickiness impeded wage adjustment.
Duy’s conclusion is turned on it’s head. Since the recent data are not “outliers”, there is no indication that wage growth will jump sharply higher, let alone soon.
Therefore, by remaining committed to its Phillips Curve framework, the Fed will continue to err, causing painful damage.