A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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Jan 15 2015

A Broken Relationship: The Phillips Curve Revisited

This year has started with a sense of inevitability about it, as a slew of positive data in recent months heightened expectations that the Fed will raise rates mid–year, or soon thereafter. To be sure, the labor market just had its best year since 1999. But while the unemployment rate registered its lowest reading since mid-2008, nominal average hourly earnings growth declined to a 26-month low in December, contrary to what one might expect if the labor market were truly tightening.

Still, there is a pervasive sense that the labor market is tightening, further empowering the Fed to raise rates. Will a declining jobless rate necessarily induce higher wage growth and thereby inflation? By investigating the relationship between the unemployment rate on one hand, and wage growth and inflation on the other, ECRI sheds some light on the timing of any future rate rise.

In our latest research, we take an in-depth cyclical look at the Phillips Curve, the relationship that encapsulates the Fed’s dual mandate, providing critical insight into the Fed’s thinking.

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