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Monetary policy and risk management at a time of low inflation and low unemployment


I do not see it as likely that the Phillips curve is dead, or that it will soon exact revenge. It is more likely that many factors, including better conduct of monetary policy over the past few decades, have greatly reduced, but not eliminated, the effects that tight labor markets have on inflation. However, no one fully understands the nature of these changes or the role they play in the current context. Common sense suggests we should beware when forecasts predict events seldom before observed in the economy.

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  1. I am referring to the most recent forecast for year-end 2018 through 2020. The unemployment rate for each forecast bottoms out at 3.4% or 3.5% in 2019 and remains below 4%. Headline PCE (personal consumption expenditures) inflation is between 1.9% and 2.1% for all 3 years and forecasts. The sources for the forecast data are given in the notes to Fig. 1.

  2. For example, there have been four periods with quarterly average unemployment below 4% since 1950. In an early 1950s episode, inflation ranged from below zero to 8%. Towards the end of the 1950s, unemployment was near 4% for a time, dipping to 3.9% for one quarter. During this low unemployment period, inflation rose steadily from under 1% to over 3%. The remaining two episodes with unemployment under 4%—one each in the 1960s and 1990s—are discussed later in the speech.

  3. This question is asked in the title of a recent editorial by Alan Blinder (2018), and a Google search reveals many similar titles. The research on the topic is reviewed more fully later in the speech.

  4. Herb Stein (1998) made the analogous point that one should doubt the assertion that some program will “cause the economy to perform outside the range of its past experience” (p. 217).

  5. See note 2. Unless otherwise noted, all statements about inflation will be four-quarter percent changes in quarterly average data, and all statements about unemployment will be about the quarterly average unemployment rate.

  6. This estimate is the CBO’s current assessment of what the natural rate was at each period in the sample, not a measure of the natural rate as perceived in real time. I discuss the importance of this distinction in Powell (2018).

  7. What is reported here is an updated version of results reported in Erceg et al. (2018), and that work provides additional discussion. Note that the “Other” term includes a constant.

  8. The text refers to when C is less than 1, in which case a rise in inflation would ultimately die out on its own. When C is 1, the Phillips curve is of the “accelerationist” variety, and any offsetting rise in inflation due to labor market tightness would be permanent unless offset by an equal amount of subsequent slack. Blanchard (2016) has a good discussion of this issue.

  9. The account I present of the role of anchored expectations in stabilizing the economy and favorably altering Phillips curve dynamics echoes a long-held view at the Fed. See Bernanke (2007) and Yellen (2015). Kiley (2015) reviews the recent research literature on this topic. Blanchard (2016) presents a very similar perspective.

  10. To be clear, during the periods of rising inflation in the 1960s and 1970s, the FOMC was generally raising the federal funds rate, but with inflation rising, the real federal funds rate was rising much more slowly or even falling. In this sense, the effective stance of policy was tightening slowly or was easing.

  11. Romer and Romer (2002) make this argument.

  12. I discuss this argument in greater depth in Powell (2018).

  13. Yellen (2017) gives a more detailed account of how a very flat Phillips curve with anchored expectations can account well for the recent inflation and unemployment data. See also note 9.

  14. Many changes not directly related to policy might nonetheless have been precipitated by the improvement in policy. For example, Pfajfar and Roberts (2018) present evidence that when inflation is more stable, people simply pay less attention to it and that this could help account for changes in the Phillips curve relationship.

  15. That is, movements in these measures have been modest, especially taking into account precision of the surveys.

  16. Gordon (2018) presents one version of the revenge hypothesis.

  17. The length of the Beige Book has varied somewhat over time; for example, the Beige Book was redesigned in 2017, with the number of words reduced about 10%. It is unclear whether the number of important words like “shortage” would have been affected by that redesign, but if so, it would go in the direction of holding down the observed recent increase.

  18. See, for example, Erceg et al. (2018).

  19. See Powell (2018).


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Correspondence to Jerome H. Powell.

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This text is reproduced from the original speech given at NABE’s Annual Meeting on October 2, 2018. Available at

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Powell, J.H. Monetary policy and risk management at a time of low inflation and low unemployment. Bus Econ 53, 173–183 (2018).

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  • Phillips curve
  • Inflation
  • Federal Reserve
  • Monetary policy