E Fed’s Andolfatto, Powell, And The Secret Goal Of The Fed

Before discussing Andolfatto and Powell, it is perhaps important for people to understand that labor power, unions, shortages, demands for wage increases, are weak following a major credit incident like the Great Recession. 

However, it does not seem like that behavior is at all imminent. That behavior has existed in the past. But as labor had power in the 50’s and 60’s, that power is now gone. In fact, labor is very, very weak. That plays against the Fed’s desire to keep the Phillips curve in play as discussed below. Following the discussion of Andolfatto, we can take a look at Ellen Brown’s recent article, because it explains much, but not all of Fed behavior. Lastly, we can take a look at the status of counterparties to the banks by looking at Chairman Jerome Powell’s important understanding of the matter.

David Andolfatto and the Phillips Curve

David Andolfatto is Fed Vice President at the St Louis Federal Reserve Bank.

Dr. Andolfatto has a personal blog representing his own views. It is titled Macromania. He is clearly a dove, meaning he is not for aggressive interest rate tightening in the New Normal, and does not see the value in ratcheting up rates when there is little inflation. Dr. Andolfatto quotes WSJ author Greg Ip:

Massive tax cuts, robust federal spending and a synchronized global upswing are expected to push annual growth in economic output to 2.7% this year and 2.5% next—past what Fed officials consider its long-run sustainable rate of 1.8%—according to projections Fed officials released after their meeting Wednesday. 

To sustain such growth, the Fed projects employers will have to dig deep into a diminishing supply of workers. That will cause unemployment, already at a 17-year low of 4.1%, to sink to 3.6% by the fourth quarter of 2019, a level last seen in the 1960s. That’s well below the “natural rate” of 4.5%, which is the rate Fed officials and many economists think the economy can sustain without eventually producing inflation. 

But it faces a problem: In theory, unemployment will eventually have to go back to 4.5%, or inflation will head even higher. Yet since records begin in 1948, unemployment has never risen by 0.9 points, except in a recession.

Dr. Andolfatto goes on to say that the Fed would say rising unemployment is simply collateral damage of Fed policy, not the goal of Fed policy: