In a speech earlier this month, Federal Reserve Chairman Jerome Powell said he believed that inflation remained anchored and did not see any signs that it would spike despite the low unemployment rate, adding that he was not worried the Phillips curve ‘will soon exact revenge’. Talking at the National Association for Business Economics, Powell puts a strong emphasis on the anchored nature of inflation expectation in his thinking about the “dormancy” of the Phillips Curve. He goes on to say that his inflation expectation was the ‘key’ to his belief that a modest steepening of the Phillips Curve would be unlikely to cause a significant rise in inflation. As he put it ‘Our best estimates suggest that so long as inflation expectations remain anchored, a modest steepening of the Phillips curve would be unlikely to cause a significant rise in inflation or demand a disruptive policy tightening. Once again, the key is the anchored expectations’ He also cited better monetary policy as a reason that tight labour markets are having less of an effect on inflation. ‘Many factors, including the better conduct of monetary policy over the past few decades, have greatly reduced the effects that tight labour markets have on inflation’ he said. However, he did say that the Fed did ‘stand ready to act with authority’ if inflation expectations move upward.
Yesterday we also heard Larry Kudlow, the White House’s economic director, say that although President Donald Trump is concerned that higher interest rates might derail the U.S. economy, he was not trying to interfere with Fed’s independence when he criticised monetary policy as ‘crazy’ (along with ‘going loco’ and ‘out of control’, take your pick). On Fox News Sunday, Kudlow said ‘The president, as a successful businessman and investor, knows a lot about these topics and he’s giving his opinion’ adding ‘His concern is the Fed might move too quickly and might choke off the recovery’. When asked if Trump’s remarks undermine the Fed’s independence or influences policy, Kudlow was quick to defend his boss. ‘He is not telling them or mandating them to change their strategy, he’s not telling them to change their policy’ Kudlow said, adding ‘He’s just raising a very important issue’.