Evolving Market Perceptions of Federal Reserve Policy Objectives

April 5th, 2014
in econ_news

By George A. Kahn and Lisa Taylor - Economic Review, Federal Reserve Bank of Kansas City

The Federal Reserve Act states that the goals of monetary policy are “maximum employment, stable prices, and moderate longterm interest rates.” Policymakers have interpreted the exact meaning of these goals differently over time depending on economic conditions and their understanding of the economy. For example, during the Volcker era when inflation was deemed excessive, policymakers placed a high priority on lowering inflation even at the expense of high and rising unemployment. During the Greenspan era, as further disinflation was achieved, policymakers emphasized “sustainable economic growth,” with a view that such an outcome could be achieved only in an environment of low and stable inflation.

Follow up:

Finally, in the aftermath of the financial crisis and soaring unemployment, the Federal Open Market Committee (FOMC) under Chairman Bernanke made explicit the nature of its “dual mandate.” The Committee specified a longer-run numerical objective for inflation and provided estimates of the unemployment rate that in the long run would be consistent with maximum employment. In addition, the FOMC tied its expected path for the federal funds rate target to an unemployment rate threshold, provided inflation one to two years ahead remained below 2½ percent.

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Source: http://www.kansascityfed.org/publicat/econrev/pdf/14q1Kahn-Taylor.pdf

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