![]() In the absence of restraints, we would expect hourly earnings to rise when the supply of labor decreases. The long-held tenets that guided decisions around monetary policy, standard Phillips curve models and the tradeoff between inflation and unemployment have been deemphasized. There will need to be other evidence that inflation is at risk of moving above mandated levels consistent with price stability. ![]() This implies that policymakers have greater freedom in setting interest rates and implementing fiscal policies to address the needs of the economy.Īs the economy has shifted, we think that policymakers have gained greater flexibility to let the economy run hot without inflation expectations becoming unanchored while letting the unemployment rate fall toward our estimate of full employment, which stands at or below 3.5%.įor this reason, the Federal Reserve last year announced its flexible average inflation targeting regime in which a decline in the unemployment rate by itself will not be sufficient to trigger an increase in rates or other forms of tighter monetary policy. ![]() The traditionally inverse relationship between unemployment and inflation as shown in the Phillips curve has flattened. ![]()
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