The Fed is “internally inconsistent”

We hear loud and clear from Yellen and several other participants that the rationale for hiking rates now and in the future, according to projections, is given by the Phillips Curve.

According to the FOMC´s latest projections, unemployment is and will remain below its long-run sustainable rate and this should put pressure on inflation.

That, however, is not what happens. Unemployment remains below the sustainable, or natural, rate for the next three years while inflation reaches target in 2019 and remains there.

Maybe a 4% unemployment rate is consistent with inflation on target, so that the current and projected rate hikes are exactly what the doctor ordered. In that case, however, the 4.6% long-run projection for unemployment is too high.

Alternatively, there may be no reliable link between inflation and unemployment. In that case, the Fed should not hike rates because unemployment is “too low”, but wait for inflation to give signs that it will exceed the target on a sustained basis if it does nothing.

Even with the Fed “at a loss”, some are beginning to bet that this expansion is going to beat the record of the 1990s expansion, which went on for 120 months. In 19 more months, the current expansion will take the “gold medal”.

The irony is that this cycle, even if it beats the 1990s record, will one day be officially called the “recovery-free” expansion!


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