I read this morning a headline from the BBC that the governor of the US Federal Reserve has said that interest rates will have to keep going up if US unemployment does not rise.
This is like a doctor in the middle ages repeat bleeding a patient with leeches because they are refusing to get better!
The idea that you cure inflation by forcing up unemployment (ie generating a recession) is based on the theory of the Phillips Curve (see Investopedia for a full explanation). There are many reasons to question the usefulness of thinking from the mid 20th Century today, but whatever one thinks might now be different, the Phillips theory is founded on the idea that the inflation one is trying to squash is demand fed.
In the current cycle, it is known that most of the sources of inflation were supply side (war in Ukraine, logistics issues, Covid lockdown in China etc.)
So we should not be at all surprised that pretty sharp jumps is interest rates have had little impact on inflation. In truth, they will have compounded the damage, like the leeching doctor. I am not some lone punter saying that, so are Nobel Prize winning economists.
It will be the case that ever increasing rates will in the end force a recession that was not otherwise happening and that will increase unemployment, a trailing indicator, and inflation will have an extra heavy and crude brake (ie the leeched patient will be dead!)
Thus we have the top monetary policy fixer in the world’s largest capitalist economy by a country mile wanting to kill off enterprise and make only banks richer, and that after 2008!
I must be dreaming.
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