Why A Stellar Unemployment Report Isn't Always A Good Thing

Federal Reserve Chairman Jay Powell and his two predecessors talk about the latest jobs report, and why they are not too worried about inflation — despite what the Phillips Curve may predict.

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Three of the most important economists in this country sat down for a panel at an economic conference in Atlanta last week. Former Fed chairs Ben Bernanke and Janet Yellen, along with the current Fed chair, Jay Powell, were talking shop and also talking about the latest jobs report. But as Cardiff Garcia and Stacey Vanek Smith from our Planet Money podcast, the Indicator, tell us, a stellar jobs report is not always a good thing.

CARDIFF GARCIA, BYLINE: It was a pretty stellar report - 312,000 jobs added in December, strong wage growth and, of course, unemployment is still below 4 percent. And then here's Jay Powell's response.

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JAY POWELL: That's quite welcome and also, for me at this time, does not raise concerns about too high inflation.

STACEY VANEK SMITH, BYLINE: Does not raise concerns about too high inflation. That seems like a weird comment to make, right? We added all these jobs, but that doesn't mean I'm worried about inflation.

GARCIA: Yeah, but economists discuss the relationship between unemployment and inflation all the time. That relationship is sometimes referred to as the Phillips curve. And that's this idea that if enough people are working, it will cause inflation. The prices of the things that we buy will start going up. And according to the Phillips curve, the reverse is also true. So if unemployment goes up, then inflation should come down because then companies don't have to raise wages to compete for workers. There's more workers out there who need a job.

And we got kind of a test of this back in the late '70s and early '80s. Inflation seemed to be getting out of control. Prices were rising up and up and up. And to get inflation under control, Paul Volcker - he was the head of the Federal Reserve at the time - raised interest rates all the way to 20 percent. By comparison, by the way, short-term interest rates right now are at 2 percent. But what Volcker did led to a weaker economy, and unemployment went up.

VANEK SMITH: All the way up to 10 percent. Inflation, though, did come down.

GARCIA: And so everybody's wondering, is Chair Powell going to worry about inflation, and is he then going to keep raising interest rates to prevent inflation from spiking higher?

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POWELL: For me, at this time, does not raise concerns about too high inflation.

GARCIA: Chair Powell is saying that 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 and jobs - even though the Phillips curve predicts it, Powell's not really seeing it.

VANEK SMITH: Yeah, it's less curvy. So...

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UNIDENTIFIED PERSON: Dr. Bernanke, is the Phillips curve dead?

BEN BERNANKE: To use a slang - economic jargon, this is an endogenous phenomenon (laughter).

VANEK SMITH: Endogenous phenomenon. That's exactly what - I was just thinking that. Basically, what Bernanke's saying is that the relationship between unemployment and inflation has changed.

GARCIA: People 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.

VANEK SMITH: 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. And companies would raise prices to try to get ahead of the trend, and that would contribute to inflation going higher right now.

GARCIA: But that's not happening. And what Ben Bernanke is 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.

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BERNANKE: And that's the, quote, "endogenous" reason why the Phillips curve is so flat.

VANEK SMITH: So economists 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.

GARCIA: In other words, it's endogenous.

(LAUGHTER)

VANEK SMITH: Stacey Vanek Smith.

GARCIA: Cardiff Garcia, NPR News.

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