As brilliant and well-schooled as she may be, Janet Yellen is using the wrong model. She believes that rising inflation will lead to lower unemployment. That's called the Phillips curve. But what we've learned over the past decades is just the reverse: Lower inflation leads to lower unemployment. They move together over the medium and long term.
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The good news is that inflation is not accelerating. It's been hovering around 2 percent or slightly less for the last five or so years. Forward-looking market-price signals, such as gold, commodities, the Treasury yield curve and the dollar exchange rate are recently showing a tiny bit of inflation risk, but not very much. These are the indicators the Fed should watch—not the unemployment rate or a basket of other labor indicators.
And if you do want faster growth and higher employment, slash the business tax rate. Move to a flat tax for individuals. Lighten the regulatory burden. Most especially, get rid of Obamacare. That will incentivize everyone in the economy and open the door for faster growth.
And while we're at it, let's keep the dollar sound. In fact, I'd like to see King Dollar appreciate by 10 to 15 percent. That will hold down inflation while supply-side reforms reignite the economy. (By the way, oil prices would probable drop to $75 a barrel, pulling the rug out from under the evil Vladimir Putin.)
Get rid of QE3, move to the 1.5 percent Taylor rule fed funds rate, and institute pro-growth economic reforms. This policy package will keep inflation low and drive economic growth higher. It worked in the '80s and '90s. But it's been forgotten in recent years.
Some will call it the old-time religion. But to that I say amen.