John C Williams: Discussion of "Prospects for Inflation in a High Pressure Economy: Is the Phillips Curve Dead or Is It Just Hibernating?" by Peter Hooper, Frederic S. Mishkin, and Amir Sufi Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the US Monetary Policy Forum, New York City, 22 February 2019. * * * Accompanyting Tables and Figures of the speech. As prepared for delivery. The Phillips curve is the connective tissue between the Federal Reserve’s dual mandate goals of maximum employment and price stability. Despite regular declarations of its demise, the Phillips curve has endured. It is useful, both as an empirical basis for forecasting and for monetary policy analysis. The paper by Peter Hooper, Rick Mishkin, and Amir Sufi—HMS for short—provides an in-depth analysis of key aspects of inflation dynamics in the United States and how they may have changed. This study is particularly timely against the backdrop of an emerging consensus that the Phillips curve has become nearly flat. If this is true it would fundamentally alter the employment-inflation trade-offs the Fed confronts. There is a lot to like about this paper: It synthesizes existing research, new analysis, and bridges the study of wages and prices. Too often these are studied in isolation. But most significant, as someone who has discussed papers at the USMPF that reached the century mark in page count, this year’s paper came in at a relatively svelte 65 pages.
Before I continue, I’ll give the standard Fed disclaimer that the views I express are mine alone and do not necessarily reflect those of the Federal Open Market Committee or anyone else in the Federal Reserve System. Has the Phillips Curve Changed, or Is it a Trick of the Data? Throughout the paper, HMS use a reduced-form Phillips curve regression as a basis for their analysis. For my remarks, I simplify the specification and assume the inflation rate depends on the unemployment gap (and variants thereof), four lags of inflation, and a constant (relative to HMS, I have dropped the import price and inflation expectations terms). 1/4  BIS central bankers' speeches  Overall, the results for the core personal consumption expenditures (PCE) price index inflation using this simplified specification are quite similar to those reported in HMS. The full-sample (1961-2017) estimated coefficients using the core PCE price inflation rate are reported in the first column of the upper part of Table 1. The second column reports results corresponding to the “spline” specification of HMS, where positive values of the unemployment gap are added to the equation to capture asymmetry in the response of inflation to labor market tightness versus slack. The third and fourth columns of Table 1 report the corresponding estimation results for the subsample of 1961-1987, and the final two columns report the results for the subsample 19882017. Like HMS, the latter sample shows far less intrinsic persistence in inflation and a severe flattening of the Phillips curve relative to the full-sample results.