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Repeats Story Initially Transmitted at 16:10 GMT Aug 30/12:10 EST Aug 30
--Calls Into Question Phillips Curve Theory
--Cites Study Finding Infl Would Only Rise 0.16pp If Unempl Fell to 3.5% 
By Jean Yung
     WASHINGTON (MNI) - Very low unemployment readings do not appear to be an
indicator of substantially higher inflation to come, Federal Reserve Bank of St.
Louis President James Bullard wrote in a recent essay, throwing cold water on
the majority view among U.S. central bankers that they should raise interest
rates gradually to head off a potential surge in inflation as unemployment dips
to historic lows. 
     Bullard and his bank have long disagreed with so-called Phillips curve
arguments that say low unemployment will translate into high inflation in a
nonlinear way. He has repeatedly said the current fed funds rate of between 1%
and 1.25% is about right for the medium term. Bullard does not vote on policy
this year. 
     "I am not aware of empirical estimates that have made a convincing case for
the nonlinear Phillips curve using recent data," Bullard said in an essay posted
to the St. Louis Fed's website Tuesday. 
     He cited a 2016 study by economist Olivier Blanchard that suggests the
Phillips curve relationship is relatively flat. 
     Blanchard estimated how much inflation would be generated if the
unemployment rate continued to decline in the future and found that if
unemployment fell from the current level of 4.3% to 3.5%, inflation would
increase by only 0.16 percentage point and remain below the Fed's 2% target.
     "The results suggest that even if the unemployment rate declined
substantially from its current level, the inflation rate would increase only
modestly," Bullard said.  
     "There seems to be little risk -- at least according to these estimates --
that inflation would pick up appreciably from its current level solely because
unemployment is low." 
     Inflation expectations, he added, "are probably a more important
determinant of inflation outcomes than unemployment." 
--MNI Washington Bureau; +1 202-371-2121; email:

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