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Cheshire Cat’s Revenge? Jerome Powell Says Phillips Curve Probably Won’t Kill Us All In Our Sleep

Cheshire cat's "revenge".

Fed chair (and man who was regretting it already starting in July), Jerome Powell, delivered a speech in Boston today that can be roughly summarized as “this is about as good as it can possibly get.”

I doubt anybody envies Powell at this point. He’s caught between an overheating economy and the incipient threat of tariff-induced price pressures on one hand, and an unhinged, would-be Erdogan demanding pro-cyclical rate cuts on the other.

Throw in what looked, until recently anyway, like a burgeoning crisis in emerging markets, and you’re left to wonder why Powell doesn’t just resign, because going forward there appear to be only three options:

  1. keep hiking gradually until you break something, either at home or in developing economies
  2. stop hiking now to pacify Trump and watch the screeching tea kettle that is the U.S. economy explode in an inflationary supernova
  3. get even more aggressive with the hawkish bent and wake up one morning with #JeromeTheJerkoff trending on Twitter on the way to being fired later that day

I’m not going to spend a lot of time covering this speech because again, it’s just a collage of superlatives about the economy contrasted with the word “gradual” as it applies to rate hikes.

One thing I would note, though, is the following highly amusing bit about the Phillips curve:

I do not see it as likely that the Phillips curve is dead, or that it will soon exact revenge.

That harkens back to “Cheshire cat’s smile” (to quote Deutsche Bank’s Aleksandar Kocic). Recall this from a June note:

Through the last four cycles, Phillips curve has asserted its importance in an unorthodox way and, as such, attained a special status; it inhabits a space different from other macroeconomic frameworks and metrics. In each cycle, it falls apart, but after every annihilation, it re-composes itself and continues to play an important role. It appears “indestructible”, but not in a conventional way, more like a survivor of one’s own death. Phillips curve functions like an organ without a body, an equivalent of Cheshire cat’s smile (in Alice in Wonderland) that persists alone, even when the cat’s body is no longer present. This time is no different in our view. The figure shows the Philips curve through several cycles starting in mid-1980s. Each cycle has a different color which implicitly marks their beginning and end. The first thing one observes is that this is more of a “spaghetti” then a curve. The main reason is that it captures different cycles – a testimony to its falling apart and recomposing itself after each.


What you’re looking at there are the vertical lines at the end of recoveries. As Kocic went on to write, “in the past, this stage always exhibited a dramatic (practically straight line) rise in wages in response to infinitesimal improvements in economic activity.” Here’s the current cycle:


Powell is basically admitting that in late-stage recoveries, the Phillips curve is prone to snapping back to life, but he’s trying to argue that thanks to “extraordinary times” and, I guess, structural headwinds to inflation, the “practically straight line” dynamic (i.e., the “revenge”) isn’t in the cards.

Draw your own conclusions.

Bullet point highlights

  • “So long as inflation expectations remain anchored, a modest steepening of the Phillips curve would be unlikely to cause a significant rise in inflation or demand a disruptive policy tightening.”
  • “This historically rare pairing of steady, low inflation and very low unemployment is testament to the fact that we remain in extraordinary times. Our ongoing policy of gradual interest rate normalization reflects our efforts to balance the inevitable risks that come with extraordinary times, so as to extend the current expansion, while maintaining maximum employment and low and stable inflation”
  • “I do not see it as likely that the Phillips curve is dead, or that it will soon exact revenge”
  • “We attribute a great deal of the stability of inflation in recent years to the anchoring of longer-term inflation expectations. And we are aware that it could be very costly if those expectations were to drift materially”
  • “FOMC forecast for unemployment and inflation is not too good to be true and does not signal the death of the Phillips curve. Instead, the outlook is consistent with evidence of a very flat Phillips curve and inflation expectations anchored near 2%”
  • “From the standpoint of contingency planning, our course is clear: Resolutely conduct policy consistent with the FOMC’s symmetric 2% inflation objective, and stand ready to act with authority if expectations drift materially up or down”
  • Indicators are showing “what I think most business people see: an economy operating with limited slack”

Full speech


4 comments on “Cheshire Cat’s Revenge? Jerome Powell Says Phillips Curve Probably Won’t Kill Us All In Our Sleep

  1. His references to ‘extraordinary times’ must be in the same vein as the Donald’s use of superlatives to describe everything. From what I’ve seen, there are a hell of a lot of Americans working minimum wage with all their cards maxed out, no life or medical insurance and little hope that their kids, who aren’t getting a good education in public schools, probably aren’t going on to any meaningful jobs in the future. Or is the term referencing the fact that we haven’t crashed yet?

  2. Pingback: What Happened To Treasurys On Wednesday? | Market Watch 247

  3. Pingback: What Happened To Treasurys On Wednesday? | Everyday News Update


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