Since then, the unemployment rate has fallen by a little less than 1 percentage point each year, and wage growth has picked up by 0.2 percentage points each year. Three quarters into 2014, wage growth is already up another two-tenths, to 2.1 percent at an annual rate. This pattern of rising wage growth is roughly what one would have expected judging by prerecession data. 3 If anything, wage growth has been running a bit above what we should have expected. This contradicts the view that the unemployment rate has understated labormarket slack. Of course, the Federal Reserve has a target for price inflation, not wage inflation. The rate of wage inflation consistent with our 2 percent price-inflation target depends on secular trends in labor productivity growth and in labor’s bargaining power – trends over which the Federal Reserve has no control and about which it can only make informed guesses. Nevertheless, the Dallas Fed’s study of the Phillips curve has an important lesson for Fed policymakers: If we keep pushing on the accelerator pedal until wage growth matches the rate that we believe to be sustainable, we will likely have pushed too far and missed our exit. Because wage growth reacts to slack with a lag, it will continue to increase even after policy stimulus is removed. Because wage growth rises at an increasing rate the farther the unemployment rate declines, the overshoot is likely to be large. I liken monetary policy to duck hunting.
It is also true that the movements of the exchange rate observed recently have surprised us to a certain extent. These surprises, however, should be taken as economic shocks that no economic relationship could have predicted. We central bankers are not very interested in short-term volatilities, but we should not miss breaks in the business cycle. For this task we need a relationship that has an economic grounding in the profitmaximising behaviour of the financial markets. And this is what the uncovered interest rate parity certainly has, and what the statistical models lack. Ladies and Gentlemen, allow me to wish to all of us fewer exchange rate surprises and the best possible forecasts! 2  BIS Review 17/2007