In Jackson Hole, sounding the death knell of the Phillips curve
Investors brace for signals about what comes next when Yellen and Draghi speak Friday
As central bankers gather for the annual Jackson Hole symposium today, stubbornly low inflation and comments from the Fed’s July minutes regarding financial stability are shaping up to make this year more interesting than many.
Inflation, which in the US has failed to meet the Fed’s targets despite falling unemployment, has defied the so-called Phillips curve for long enough to render the model defunct. Asia Unhedged has been talking about this for some time:
Google “Phillips Curve,” and the definition that pops up is: “A supposed inverse relationship between the level of unemployment and the rate of inflation.” There are lots of other things, though, that influence the price level, like technology displacing higher-paid workers and horizontal drilling extracting oil at ever-cheaper prices.
Equity markets didn’t mind [June 14’s] unexpectedly low inflation and retail sales report, believing that the Fed would become more cautious. But when Fed Chair Yellen dismissed the disinflation signals from the Treasury market as “unreliable” and attributed the Fed’s lousy inflation forecast to a few “idiosyncratic” anomalies (mobile telephony and pharmaceuticals), investors became alarmed.
Judging from the Fed’s July minutes, not to mention Mario Draghi’s speech earlier this week, central bankers are beginning to come to their senses.
But inflation and unemployment are not the only things on policy makers’ minds. As the topic of Janet Yellen’s speech to be given on Friday suggests, financial stability will be front and center.
“This is the key issue for monetary policy today,” Mohamed El-Erian, chief economic adviser to Allianz was quoted by the Financial Times as saying. “There is now starting to be a concern about financial stability that wasn’t there six months ago.”
“Given the kind of risk-taking we are seeing” he says, the Fed should accept its unofficial mandate of ensuring financial stability.
“When people in the markets every day say there are risks building, that is something we have to take seriously,” he added.