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Powell Spills the Beans: No Phillips Curve, No Keynesian Central Banking

• By David Stockman David Stockman**Q**s Contra Cor

Thursday was a Red Letter day for that old "you don't say!" riposte. We are referring to the obvious response to Powell's black and white confession to the Senate Banking Committee yesterday that more people working doesn't cause inflation.

"The relationship between the slack in the economy or unemployment and inflation was a strong one 50 years ago … and has gone away," Powell said Thursday during his testimony before the Senate Banking Committee. He added the strong tie between unemployment and inflation was broken at least 20 years ago and the relationship "has become weaker and weaker and weaker."

Why, yes, it apparently has disappeared entirely per the graph below.

Since the recessionary jobs bottom in 2010, the unemployment rate (brown bars) has plunged from just under 10% to a 50-year low of 3.7% at present. Yet despite the apparent massive evacuation of labor "slack" from the US economic bathtub, real weekly earnings of prime age males (purple bars) have essentially flat-lined during the last eight years.

So you could put a stake in the so-called Phillips Curve and be done with it. But actually the story is far bigger and Powell's confession implicates much more than merely the wage/employment equation.

To wit, it actually crushes the core tenant of Keynesian central banking. Namely, that Fed policy operates largely in a closed bathtub of domestic GDP and that by raising or lowering the water level of "demand" therein, the Eccles Building can bend domestic inflation, employment and economic growth to its will.

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