San Francisco Fed John Williams is sanguine

Mr. Williams was quite upbeat about the U.S. economic outlook in an interview with Fox News Channel, echoing remarks made to The Wall Street Journal Thursday.

Citing broad-based employment gains in both low- and high-wage sectors, Mr. Williams said he believes the U.S. unemployment rate, currently at 5.7%, will fall to 5% by the end of this year. That’s a level consistent with full employment, which Fed officials see as the lowest rate of joblessness that doesn’t generate undue inflation.

“We’re seeing lots of positive developments,” Mr. Williams said. “There are lots of signs of a good consumer spending trajectory.”

Asked about U.S. inflation, which has been undershooting the Fed’s 2% target for nearly three years, Mr. Williams was also sanguine. He said the recent hit to consumer prices had been primarily driven by plunging energy costs, adding he expects inflation to stabilize and return to the central bank’s 2% goal over the next couple of years.

Let´s parse him:

The data does not show 5% unemployment as the lowest rate of joblessness that doesn´t generate undue inflation (unless by “undue” he means any positive rate of inflation)

Parsing Williams_1

Where does he see the “good consumer spending trajectory”?

Parsing Williams_2

Inflation has been falling ever since the 2% target became official, irrespective of oil prices remaining high or, more recently, falling!

Parsing Williams_3

Medium and long-term inflations expectations have remained below target throughout and are now plunging!

Parsing Williams_4

Maybe Williams is looking at things upside-down!


When Modigliani and Papademos “invented” NAIRU (NIRU at the time) in a BPEA paper in 1975, their clear aim was to downplay “monetarism” and argue for monetary expansion expansion based on the fact that NAIRU/NIRU was above its “non accelerating rate”:

At this point the analysis confronts a widely held concern, encouraged by at least some monetarists, that such a rapid rate of growth and sudden acceleration of the money supply , would unfavorably influence prices and inevitably set off a new round of inflation.

Our analysis indicates that such concerns are unfounded; it implies that inflation systematically accelerates only when unemployment falls below NIRU, and the M1 growth that we expect will be needed as a component of a policy package aimed at approaching NIRU from above over the next two years.

In economics, it´s interesting to observe how some things, especially those that require “estimation”, become “gospel” and, despite their suspicious origins, never go away, being endlessly “reestimated”.

No surprise, then, that forty years later, Robert Gordon wrote “The Phillips Curve is Alive and Well: Inflation and the NAIRU During the Slow Recovery”:

The triangle model shows that the puzzle of missing deflation is in fact no puzzle. It can estimate coefficients up to 1996 and then in a 16-year-long dynamic simulation, with no information on the actual values of lagged inflation, predict the 2013:Q1 value of inflation to within 0.50 of a percentage point. The slope of the PC relationship between inflation and unemployment does not decline by half or more, as in the recent literature, but instead is stable. The model’s simulation success is furthered here by recognizing the greater impact on inflation of short-run unemployment (spells of 26 weeks or less) than of long-run unemployment. The implied NAIRU for the total unemployment rate has risen since 2007 from 4.8 to 6.5 percent, raising new challenges for the Fed’s ability to carry out its dual mandate.

Maybe John Williams is a fervent adept!

One thought on “San Francisco Fed John Williams is sanguine

  1. The easy acceptance of subpar macroeconomic performance is one of the most exasperating traits of the current-day Fed and economics profession.

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