Fed Policy and Velocity’s Dance

by Jerry O’Driscoll*

The U.S. economy has been growing slowly but steadily since the trough of the Great Recession in June 2009. Deep recessions are typically followed sharp recoveries. Not so this time.

More recently, there is the mystery of low inflation. The Fed’s preferred inflation measure, the core PCE index, has consistently fallen short of its target rate of 2 percent. In July 2017, it came in at a 1.41-percent annual rate. For the Fed, improved growth in employment and the falling unemployment rate should foreshadow a higher inflation rate. The rationale for this is the old Phillips Curve. The reality is that the model is flawed.[1] Continue reading