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Markets ‘married to 1987’ economic models, Fed policy more forward-thinking, says economist

  • Markets are "married to 1987 models" of economic theory, an economist has told CNBC.
  • Federal Reserve policy by contrast is "very much a function of 2007," she said.
  • Developments such as the "gig economy" and fintech have radically shaped the landscape of the economy.

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which is used by economists to analyze the inverse relationship between unemployment and the rate of inflation, was outdated.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."

Traders work as a television monitor displays Federal Reserve Chair Janet Yellen announcing the Fed's decision to raise interest rates on the floor of the New York Stock Exchange (NYSE) June 14, 2017 in New York City.
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Traders work as a television monitor displays Federal Reserve Chair Janet Yellen announcing the Fed's decision to raise interest rates on the floor of the New York Stock Exchange (NYSE) June 14, 2017 in New York City.

The gig economy and the fintech effect

Komileva added that new economic developments such as the "gig economy" – where workers operate under much more flexible conditions, on a temporary or freelance basis – and financial technology (fintech) were radically changing the landscape of the economy.

"Indeed, in the gig economy, in the new fintech-driven economic environment, we have a relationship between full-time/part-time jobs which is changing," she said.

Strategists and investors reacting to Fed meetings and new inflation data should consider this new economic model, the economist added.

"We are at a time of enormous structural productivity, technological change. You have to just look at the financial industry to understand. So people have been prioritizing job security for chasing the next paycheck, and I think that is an important thing particularly when we look at the measures."

Inflation below Fed expectations

Data from the Labor Department in July showed June inflation well below the U.S. central bank's 2 percent target.

The consumer price index (CPI) rose below expectations at 1.6 percent in June from the previous year – a slowdown from a 1.9 percent rise in the previous month.

U.S. consumer prices were unchanged that month, casting doubts over whether the Fed would be able to increase interest rates for a third time this year.

The central bank is set to meet in mid-September to discuss interest rates, a meeting which is expected to draw considerable attention from investors.

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