The Fed is caught between the Phillips-curve-driven convictions of its leadership – reflecting the assumptions of most mainstream economists – and the reality that the Phillips curve is badly broken. But this is not a recent development.

As we wrote around the end of the last century, “[t]he ‘Phillips curve’ relationship between unemployment and inflation has long been a dubious proposition. The [U.S.] Future Inflation Gauge [USFIG] remains a better guide to the direction of inflation.”

Indeed, in the years since the Great Recession, regardless of the unemployment rate, inflation has fallen during inflation cycle (IC) downturns and risen during IC upturns, which the USFIG has accurately predicted. Following the latest cyclical downturn in the USFIG, a fresh IC downturn has already begun, which is why inflation is falling and will continue to decline in the coming months, regardless of the decline in the unemployment rate below “full employment.”

Meanwhile, a Phillips-curve-driven Fed, confused by the simultaneous downturns in unemployment and inflation, is clinging to its faith that inflation will soon revive. Eventually, the inflation cycle will turn back up. But it is the USFIG – not the Phillips curve – that will provide early warning of that directional shift.