Jagger Volker, Phillips, Federal Reserve discussed on The Indicator from Planet Money
And we got kind of test to this starting back in the very late nineteen seventies and early nineteen eighties. Inflation was really high and seemed to be out of control prices were rising and rising and rising and then Paul Volcker PUM Jagger Volker. Okay that works. He was the head of the Federal Reserve at the time and Volker did to get inflation under control. Was he raised interest rates all the way to twenty percent by comparison interest rates right now. Short-term interest rates are two percent. All right. So raising interest rates all the way to twenty percent lead to a weaker Connie and unemployment went up way up. It went all the way up to ten percent. But inflation did come down. And ultimately the economy settled down and seemed to be on track by the early eighties, which brings us back to Jay house comment. The unemployment rate is low right now and in twenty eighteen wage growth did start exceleron. And so everybody's wondering is chair pal. A look at this and worry about inflation. And then going to keep raising interest rates to prevent inflation from spiking higher for me. At this time doesn't does not raise concerns about to high inflation Jerry Palestine, the even though unemployment is low and wage growth is rising. It doesn't necessarily mean that higher inflation will follow. So this relationship between inflation in jobs, even though the Phillips curve predicts it POWs, not really seeing it death-list curvy and Janet Yellen, by the way, Janet Conde gallon agreed. The linkage. So I believe that there is a linkage between slack in the labor market in product markets and inflation, but the strength of that linkage is not very great. So we have relatively flat Phillips curve is in the way of putting that a flat Phillips curve. So nick. Phillips curve dead. So so to use a slaying economic jargon. This is in dodge Innis, phenomenon dodgy phenomenon exactly I was just thinking that you know, what? But also he recognized that he was dropping a jargon bomb. So that's okay. Basically, what Bernanke saying is that the relationship between unemployment and inflation has changed. And he says it started changing with Volker in the late seventies. Chairman Volcker three of us a big favor by hanging flation under control, and helping to anchor inflation expectation, basically back when inflation was super high in the seventies people then saw that the Federal Reserve would raise interest rates really high. If it needed to to bring inflation back down and ever since then inflation has stayed low because of that people in companies right now don't think there's much of a chance that inflation will get out of the Fed's control in the future. And here's the key people and companies act accordingly because if they worried that inflation was going to be much higher in the future. They would spend more money now while their dollar would still buy stuff and companies would raise prices to try to get ahead of the trend and that would contribute to inflation going higher right now. But. It's not happening right now. Unemployment is low and yes wage growth is going up, but companies are not raising their prices aggressively. And what Ben Bernanke you saying is that it's precisely because of what the fed did in the past that the link between low unemployment and high inflation is weaker than it used to be and the gave us flexibility the ability to to take very stimulant of steps without worrying place, you'll become immediate problem. And that's the quote in dodge in his reason, why the Phillips curve is so flat thinks part of the reason inflation stays in. Check is because of this faith in the job of Federal Reserve chair that faith is part of what changed the economic relationship between unemployment and prices, so the communists still strongly debate whether the Phillips curve is really dead or just resting. But if it is then it was possibly killed by the people in this room people with this job fed chair. In other words, it's Dazs Innis. The indicator is produced by Constanza guy Gherardo edited by paddy Hirsch and produced by NPR. Human behaviour doesn't always make a ton of sense at least on the surface. I said, would you mind if I give the dogs a little piece of cracker with some hot sauce on it? And without and see what they choose hidden brain, a spicy podcast about science psychology. And why people do what they do.