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The Phillips curve has been dormant for over two decades, as the dynamic between tight labor markets and inflation has virtually disappeared. Yet, the demise of the Phillips curve should not be used as a reason for policymakers to think it is safer to run with a more stimulative monetary policy.
The transmission of modern day monetary policy works mainly through the asset markets and shifts the balance of risks towards asset cycles and financial stability. Decision to ease monetary policy today against a backdrop of record asset values would be tantamount to easing policy at the peak of previous high inflation cycles.
Testimony - Congress - Fed - Chair - Jerome
In testimony before Congress, the Fed Chair Jerome Powell acknowledged that the linkage between unemployment and inflation has been broken for at least 20 years ago. A number of fundamental and technical factors have come into to play in the past two decades to alter this relationship.
For example, in 1998 the Bureau of Labor Statistics (BLS) determined that it could no longer find an adequate sample of owner-occupied housing to safely ensure an accurate measurement of owners rent so BLS decided to rely exclusively on the survey data from the rental market to measure both owner's rent and apartment rents, even though the two markets are fundamentally different.
Measurement - Changes - Reasons - Importance - Case
Measurement changes for technical reasons tend to be of minor importance but in this case the risk of altering the behavior of reported inflation as well as its relationship to other series was high for two reasons; first, the owner's rent is the single largest component, accounting for over 30% of the core consumer price index; and, second, it was being replaced with a rent series that tends to move countercyclical, or the opposite direction of house price inflation.
Here's a quick glance at how the owners rent series tracked housing prices under...
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