Fed Officials Reveal More Doubts About Inflation Dynamics, but See Few Solutions [WSJ]

According to the Philips Curve, the recent, record low unemployment rate in the US has to be linked to high inflation. However, the current inflation in the US is running below 2.0%, much lower level than expected. Also, Taylor rule, a rule of thumb for the monetary policymakers, dictates that the policy rate should be up if inflation is over expected inflation or production is more than the full-employment level of production. Thus, seeing the US’s unemployment rate that is historically low for the past couple of decades, the Federal Reserve has heightened interest rate, following Taylor rule. However, the observed inflation in the US is not parallel with what the model predicts. This is where a conundrum for the Fed arises: the models appear out-of-date but the solutions are hard to be found.

www.wsj.com/articles/feds-brainard-says-central-bank-should-welcome-modest-rise-in-inflation-11558023372

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