The Fed: A Big Brawl Beckons

The second Trump administration is headed for a colossal collision with the Federal Reserve. Make no mistake, almost all of the media will be siding with Fed head Jerome Powell and his institution.

-  Steve Forbes

They will parrot the central bank's party line that any attack is a highly dangerous assault on its independence and a formula for future inflation.

Don't buy this baloney.

The looming big battle isn't about the Fed's independence; it's about the performance of our central bank. More particularly, it's about the models on which it bases its decisions. The core premise of these models is that prosperity causes inflation. An economist named A.W. Phillips posited that there's trade-off between inflation and unemployment. Want less unemployment, you'll get higher inflation. And vice-versa.

The so-called Phillips curve is holy writ at the Fed and most other central banks. There are two big flaws with this, in addition to being belied by what's happened in the actual world. The curve is wrong.

During recent years, for instance, unemployment in the U.S. remained low, even as we experienced the worst rise in the cost of living in more than 40 years.

The Fed is flummoxed but refuses to do a searing selfexamination of its core belief. Admitting that its theology is wrong is hard for any institution, so the central bank clings to its bogus catechism.