Tuesday, November 17, 2009

Chart of the Week: Let Them Eat Prozac

source: www.calculatedrisk.com
Conventional economic wisdom is that full employment and inflation are correlated. Workers with money in their pockets bid up prices--a case of increased demand for limited supply (demand-pull in Keynesian terms). There are other sorts of inflation, notably relevant now as the Fed drastically expands the money supply, is monetary inflation. Here is a chart which shows the inverse relationship between the Federal Funds rate, a key tool used by the Fed to control inflation, and employment. As you can see the Federal Reserve usually does not increase the discount rate until after a peak has been reached in unemployment. You are at the top of the red line on the right. Think of it as a greater misery leading indicator.