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Joined: 28 Dec 2005 Posts: 12651
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Posted: Mon Mar 10, 2014 11:15 pm Post subject: Fed, Inflation Expectations & Unemployment |
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PeakTrader:
“…a 1% increase in the overestimate of the next 6 months’ annualized CPI inflation corresponds to a one third of one percent (0.33%) increase in the unemployment rate.”
http://angrybearblog.com/2014/03/irrational-inflation-phobia-and-unemployment-in-the-usa.html#comments
It’s possible the overestimate, since the inflationary 1970s, better regulates the business cycle, lengthens expansions, or higher unemployment is offset by longer expansions.
Longest economic expansions in U.S. history:
1991-01: 120 months
1961-70: 106 months
1982-90: 92 months
2001-07: 73 months
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It should be noted, there was a structural break after 1982, “The Great Moderation,” and the 1970s was a long-wave bust cycle, where the Fed prevented another Great Depression by inflating the economy.
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Robert, I doubt the Fed has been restrictive, over the past 30 years or so, because a group of forecasters had higher inflation expectations than actual inflation rates, resulting in a higher level of unemployment, which implies the Fed had higher inflation expectations too.
Over the 1982-07 period, which I call the “long boom,” the actual inflation rate was generally between 2% and 4% with price stability. Those were conditions for sustainable growth, which is optimal growth. There were only two recessions (one moderate and one mild) between 1982-07.
Let’s look at average annual per capita real GDP growth:
1946-64: 1.90% (bull market)
1965-82: 1.85% (bear market)
1983-00: 2.56% (bull market)
1982-07: 2.30% (bull and bear markets)
Smoothing-out business cycles results in a higher level of growth, because economic boom/bust cycles are inefficient both in the boom and bust phases. It’s better to error on the side of caution, because if inflation expectations are too low, it’s more likely accelerating inflation will take place and require more tightening causing a recession. Price stability is what’s really important to promote growth.
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Or, put another way, economic forecasters are more likely to overshoot their inflation expectations than the Fed.
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