New York Fed President John Williams said in a speech that the Philips curve is the “connective tissue” between the Fed dual mandate of maximum employment and price stability. It’s “alive and well” and remains an “empirical basis for forecasting and for monetary policy analysis.” He said he “wholeheartedly” agree that Fed “must not be complacent about inflation expectations becoming unmoored, whether at too high or too low a level.”
He noted that Fed policymakers “must remain vigilant regarding a sustained takeoff in inflation.” That include the risk that “very tight labor markets could eventually lead to a resurgence of inflation and unmoor expectations, as in the 1960s.” But at the same time “We must be equally vigilant that inflation expectations do not get anchored at too low a level.” And the current “persistent undershoot of the Fed’s target risks undermining the 2 percent inflation anchor.”
