With US Unemployment Down To 8.4%, FED Shifts Long Term Goalposts

In 2012, the Federal Open Market Committee (FOMC) issued its first Statement on Longer-Run Goals and Monetary Policy Strategy, stating the goal of articulation of longer-run inflation of 2 percent.

The Committee at the time did not set a numerical objective for maximum employment due to the structure of the labor market being strongly influenced by non-monetary factors that can change over time. 

In response to the congressional goals of maximum employment and price stability, the FED then led a public review, in early 2019, to assess the monetary policy strategy, tools, and communications in an effort to achieve these goals. 

The understanding of the economy has evolved since 2012.

For the FED, it means a necessary revision along the the monetary policy framework they have set since 2012.

Numerous factors have contributed to the revamp of this framework: 

First, assessments of the potential, or longer-run, growth rate of the economy have declined.

Second, the general level of interest rates has fallen, both in the United States and around the world.

Third, the record-long expansion that ended earlier this year led to the best labor market we have seen in some time.

Fourth, the historically strong labor market did not trigger a significant rise in inflation.

On August 27th, the Federal Reserve System (FED) thus released a revised Statement on Longer-Run Goals and Monetary Policy Strategy.

Some significant changes made to the framework documents include: 

• On maximum employment, the FOMC emphasized that maximum employment is a broad-based and inclusive goal and reports that its policy decision will be informed by its “assessments of the shortfalls of employment from its maximum level.”
• On price stability, the FOMC adjusted it to “following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.”

In an interview with FED chairman Jerome Powell on NPR in the U.S., Powell said that the low interest rate is likely to prevail for years.

Low interest rates have been a global phenomenon, and places outside the U.S. too, are no exception to the results of globalization. 

The unemployment rate is long known to be associated with the inflation rate, as the two share a stable and inverse relationship.

While earlier reports show that the market was at its strongest despite the near-zero rate, the FED could use a higher interest rate to boost the economy. 

Prior to the outbreak of the COVID-19 pandemic earlier this year, the U.S. economic outlook was looking very positive.

Now though, the unemployment rate has slid down to 8.4%, still higher than normal, but better than the peak of 14.7% earlier in the pandemic. 

Still, in the service industry, workers that come into contact with the public are showing no signs of recovery.

For these oftentimes low-skilled workers, quarantine and travel bans mean they have had no stable income for the past few months. 

“Without question, this event has exacerbated pre-existing disparities in our economy that were already troubling,” Powell said in the interview with NPR.