St. Louis Fed President James Bullard gave remarks titled “How to Extend the U.S. Expansion: A Suggestion” today. There he argued that empirical Phillips curve relationships have largely broken down in the last two decades. That is, the relationship between inflation and unemployment “began to disappear”. He suggested Fed to consider financial market information in its monetary policy setting. The yield curve is taken as a good predictor of future real economic activity. The Treasury Inflation-Protected Securities (TIPS) provides indications on inflation expectations.
Bullard said:
- The yield curve information suggests that financial markets do not see excessive real growth or excessive inflationary pressure over the forecast horizon.
- The TIPS-based inflation compensation data suggest that markets do not expect the FOMC to achieve the 2 percent inflation target on average on a PCE basis over the next decade.
Combined, theses two market indicators argued that “current monetary policy stance is already neutral or possibly somewhat restrictive.”
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