The Economist September 5th 2020 pp63-64 |Finance & economics| The Federal Reserve | “New Job Description” “The Fed’s move to emphasize full employment could start a global trend”
Since the 1970s, in American, there was a belief in the “Phillips Curve” which is an inverse linear association between Inflation and Unemployment-Low Employment Would Lead To High Inflation. Recent history when unemployment was as low as 4% proved that inflation did not rise. There are at least three potential explanation for this “flattening of the Phillips Curve”; 1) The Fed has intervened effectively to manage inflation, 2) Workers have lost bargaining power thereby easing pressure on firms to raise prices and 3) Technological change and globalization allow options to lower cost of production and consumers ability to choose avoiding the need to raise prices. So the FED now is focused on maintaining an average inflation of 2%. Recently other central banks have discounted the greenback in response to the FEDs August 27th announcement but that will indirectly reduce demand for their country's goods and services. With interest rates already near zero these other central banks will be without options to avoid “a drag on spending” and may eventually follow the FED policy-keeping inflation around 2%.