Federal Reserve policy and mechanism has kept up with the pace of technological change while markets are stuck in the past, according to an economist.
“First of all, we markets are married to 1987 models of the Phillips Curve, the relationship between employment and wages, and we’ve spent all our time wondering why it’s not working,” Lena Komileva, chief economist at G+ Economics, told CNBC on Friday.
She said that the Phillips Curve model, which is used by economists to analyze the inverse relationship between unemployment and the rate of inflation, was outdated. It stipulates that decreased unemployment in an economy will correlate with a higher rate of inflation.
Komileva explained that by expecting Fed inflation results on the basis of this model, markets have been misinterpreting inflation data.
“When you look at the Fed’s policy and mechanism, balance sheet and rate levels at the moment, it’s very much a function of 2007. So it’s about time we stopped looking back 20 years and update our understanding of inflation to 2017.”