Morning Report: The Death of the Philips Curve

Vital Statistics:


Last Change
S&P futures 3506 2.6
Oil (WTI) 43.24 0.17
10 year government bond yield 0.74%
30 year fixed rate mortgage 2.93%


Stocks are higher this morning on no real news. Bonds and MBS are down small.


The stock market has been rocking this month. It turns out this is the best August in 30 years.


We will have a decent amount of data this week, with the jobs report, construction spending, ISM and productivity. The markets will be closing early on Friday ahead of the Labor Day weekend.


Fed Vice Chairman Richard Clarida said the Fed isn’t looking to raise rates even if unemployment starts falling. “My colleagues and I believe that this new framework represents a critical and robust evolution of our monetary policy strategy that will best equip the Federal Reserve to achieve our dual-mandate objectives on a sustained basis in the world in which we conduct policy today and for the foreseeable future,” Clarida said in prepared remarks for a speech to the Peterson Institute for International Economics. The “new framework” he is referring to is the asymmetric risks around inflation, which means that the Fed will let the labor market run hot before raising rates. Essentially this is the death of the Phillips Curve.

The Phillips Curve was a theory that came from the 1960s which said that as unemployment falls, inflation will rise. The Fed had used that sort of model in the past to help guide monetary policy, and the new monetary framework basically says that the Fed will no longer slow the economy pre-emptively as unemployment falls. The Fed will now wait until inflation is running above its 2% target before raising rates. We saw unemployment in the mid 3% range, and inflation remained under control. The punch line is that rates will stay at the zero bound for years unless we get some sort of unexpected increase in inflation.

22 Responses

  1. Interesting poll analysis from Franklin Templeton:

    The first round of our Franklin Templeton–Gallup Economics of Recovery Study has already yielded three powerful and surprising insights:

    1) Americans still misperceive the risks of death from COVID-19 for different age cohorts—to a shocking extent;

    2) The misperception is greater for those who identify as Democrats, and for those who rely more on social media for information; partisanship and misinformation, to misquote Thomas Dolby, are blinding us from science; and

    3) We find a sizable “safety premium” that could become a significant driver of inflation as the recovery gets underway.


    • Is it partisanship, or does one particular ideology appeal more to those whose personalities are far quicker to be exposed to low-or-no information and assume instantly that they have a complete understanding of hugely complex issues?

      Given on side tends to say “we follow the science” and call others “science-deniers” and then make ridiculous comparisons to denying evidence-free assertions about COVID or Climate Change as being the same as “denying” the existence of cars are iPhones (because they were made with science) . . . there’s clearly a side more prone to not knowing what they don’t know. And my argument would be that partisanship doesn’t cause that, but a certain band of the ideological spectrum is more attractive to people who already manifest that tendency.


  2. Chris Cilliza beclowns himself. Some of the replies are pretty funny.


      • Nice country yah got there, be a shame if something happened to it.


        • That’s a pretty clear message. Definitely betting hard on the “frightened and obedient” portion of the electorate.


        • ““Does anyone believe there will be less violence in America if Donald Trump is reelected?””

          That may not be the operative question. My question is does Biden have the will to do what it takes to stop the riots?

          That may well require more violence in the short term than the current ongoing level of the riots.


        • Does anybody believe there will be less violence under Biden? I don’t. The only way there will be less violence “under Biden” is if Biden gets elected but all the local politicians feeding the violence in their cities are ejected.

          And it’s an incomplete proposition. Do I want “less violence” through complete submission to radical Marxists? No, I don’t–even if anything would ever satisfy them enough, and once they discover violence gets them the power they want, they wouldn’t be stopping anyway.


        • How can there be any doubt every mayor of a riot afflicted city will go Mayor Daley on them the day Biden is declared victor. These are professional politicians, not suicide bombers.


        • That makes sense. I’m not sure they aren’t suicide bombers, though. But if they aren’t–despite some evidence to the contrary–then I’m sure you’re right.


        • McWing:

          Nice country yah got there, be a shame if something happened to it.

          That is exactly the game that the Dems are playing.


        • I don’t feel like it’s a winner for independents and swing voters, and may even motivate some typically non-voters to go and cast a “f**k you” vote.


      • Good write up. Matches up a lot with the NYT breakdown that was posted previously.


      • That is. Although I get the impression he thinks there’s something new about incompetence and clusterfucks like this. There is not. We just don’t typically have the opportunities for them to happen, or go fatal in full public view of the world. People are always stupid and incompetent and always have been–the culture has to be smart enough to avoid these kinds of situations. In this case, pandering to revolutionaries masquerading as rioters masquerading as peaceful protestors is the source of the final outcome. Everything else was just all the gears grinding and seizing up the way they always do.


    • The tweet includes a picture of what looks like a city aflame. I’m really . . . I mean, “beclowns” doesn’t cover it. It’s almost like it’s intentional.


  3. I figured the Phillips curve died in the 1970’s with stagflation which was supposedly impossible under the theory.


    • In defamation law, “malice” does not mean “ill will” or “spite” or “hate.” It means knowledge that a claim was untrue, or reckless disregard about its truth or falsity. “Reckless disregard” has a special meaning too — it means not just foolishness or extreme negligence, but making a factual statement while deliberately disregarding evidence that it is false.

      I feel like most folks in the media are leaving themselves wide open to these kinds of suits all the time these days.


  4. re: John Thompson

    In 1968 John tried out with the Houston Mavericks of the ABA. My friend Kendall Rhine, who won the C spot, introduced me to John in the pre-season, after I watched a scrimmage at Kendall’s invitation. Here is what I recall:

    I mentioned to John that I had seen him in a HS All Star game in 1960. He said “And your point?”

    His public persona always reminded me of that moment, when all three of us were 25. Now he has died, and Kendall is battling cancer, and I am in good health but staying home with my wife during the pandemic.

    Seems like yesterday, 52 years ago.


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