The Phillips Curve: Read the Fine Print

The Federal Reserve’s Dual Mandate is the Phillips Curve.

It’s not that the Fed is charged with the impossible task of reaching a state of 2% inflation and full employment; rather, the Fed is trying to obtain these two goals, believing (according to the Phillips Curve), these goals come as a trade-off needing to be managed.

Just two weeks ago, Chair Powell spoke of this on-going battle, like a never-ending tug of war between inflation and employment, as reported by Reuters:

We have to balance those two goals when they are in tension, as they are right now.

This tension, as described by Powell, is not just another Powell-ism, or something the head of America’s central bank said off the cuff in an interview. Instead, this idea of balancing inflation against employment has been a widely discussed phenomena in academia and by central bankers for several generations. The current CEO of the Federal Reserve Bank of New York, a man who may be more powerful than Powell himself, co-authored a paper in 2014 explaining the trade-off, calling it the “divine coincidence of monetary policy,” whereby:

…the central bank can simultaneously stabilize both employment and inflation by altering a single policy instrument—the short-term nominal interest rate.

According to one of the current members of the inner circle at the Fed, just by changing interest rates, employment and inflation will simultaneously stabilize.

The above quotes are only two examples. But countless instances exist where economic planners discuss the necessity of balancing the two objectives, as if it’s a zero-sum game.

To best illustrate the juggling act, the St. Louis Federal Reserve Bank explains the Phillips Curve, or the belief there is a trade-off between inflation and unemployment. (read more and see graphics)