Politics & Policy

Phillips Heads Screw Drivers

Dated and discredited thinking is infecting Federal Reserve policy.

Many analysts scoured this week’s Federal Reserve minutes looking for clues as to what the central bank is going to do. Raise rates? Not raise rates? I scoured them, too, in search of a reason why the fed funds rate hasn’t already been lifted — like the stock, bond, and commodities markets have been telling the Fed to do.

Bad policy comes from bad ideas. And what bad idea has been knocking around in the collective known as the FOMC? One paragraph in the latest Fed statement is all you need to read:

Participants generally expected that core inflation would edge lower over the next two years, reflecting a slight easing of pressures on resources, well-anchored inflation expectations, and the waning of temporary factors that had boosted prices last year and early this year. Participants anticipated that total inflation would slow as well, particularly if market expectations of a modest decline in energy prices in coming quarters were to prove correct. But they were concerned that the high level of resource utilization and slower productivity growth could augment inflation pressures. Against this backdrop, the Committee agreed that the risk that inflation would fail to moderate as expected remained its predominant policy concern.

And now the Bowyer English Version: Even though inflation has been going down and probably will continue to fall, we’re going to starve the banks of cash because some long-dead central planner named A.W. Phillips said that growth is bad for prices. When entrepreneurs and investors create too much wealth, our job is to yank back on the chain as hard as possible. The drivers of growth must be punished, otherwise everybody’s going to get a little too excited, and then prices will rise. Better to risk a deflationary recession than to let the drivers drive too fast.

A.W. Phillips was, by all accounts, a fine engineer and a war hero to boot. But he was an awful economist whose machinations (e.g., the Phillips curve) have done enormous harm over the decades.

It’s time for Ben Bernanke to stop listening to the Phillips Head Screwdrivers who dominate the Fed staff cubicles and start listening to the markets.


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