Money, Banking and Financial Markets

Commentary

Commentary

 
 
Posts tagged Employment
From Inflation Targeting to Employment Targeting?

Last year, the Federal Open Market Committee (FOMC) modified its monetary policy framework to focus on average inflation targeting. They stated that “appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time” after “periods when inflation has been running persistently below 2%.” At the same time, the Committee scaled back efforts to preempt inflation, introducing an asymmetric “shortfall” strategy which responds to employment only when it falls below its estimated maximum. FOMC participants view these strategic changes as means to secure their legally mandated dual objectives of price stability and maximum employment (see our earlier posts here and here).

Prior to this week’s FOMC meeting, the Committee’s forward guidance explicitly balanced these two goals. However, in what we view as a remarkable shift, changes in the December 15 statement are difficult to square with any type of inflation targeting strategy. Despite the recent surge of inflation, the Committee’s new forward guidance removes any mention of price stability as a condition for keeping policy rates near zero. Instead, it focuses exclusively on reaching maximum employment.

In this post, we provide two reasons why such an unbalanced approach is concerning. First, a monetary policy strategy that ranks maximum employment well above price stability is unlikely to secure price stability over the long run. Second, FOMC participants’ projections for 2022-24 are a combination of strong economic growth, further labor market tightening and a policy rate well below long-run norms. This mix seems inconsistent with the large decline in trend inflation that participants anticipate. While policymakers certainly can and do revise their projections, persistent underestimates of inflation fuel the perception that price stability is a secondary, rather than equal, goal of policy….

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Steve Cecchetti and Kim SchoenholtzFederal Open Market Committee, FOMC, Monetary policy, Policy strategy, Monetary policy strategy, Statement on Longer-Run Goals and Monetary Policy Strategy, Policy framework, Inflation, Inflation targeting, Inflation expectations, Policy reaction function, Monetary policy reaction function, Employment, Central bank mandate, Hierarchical mandate, Dual mandate, Summary of Economic Projections, SEP, Forward guidance
When Government Misguides

Governments play favorites. They promote residential construction by making mortgages tax deductible. They encourage ethanol production by subsidizing corn. They boost sales of electric cars by offering tax rebates. These political favors usually diminish, rather than increase, aggregate income. They’re about distribution, not production.

With the ascendance of Donald Trump to the presidency, U.S. government intervention has taken a particularly troubling turn. Not only has he threatened companies planning to produce their products outside of the United States, but he has appointed strident free-trade opponents (ranging from China-bashing Peter Navarro to trade-litigator Robert Lighthizer) to key positions in his administration. In his first week in office, President Trump has pulled the United States out of the Trans-Pacific Partnership (TPP) and moved to renegotiate the North American Free Trade Agreement (NAFTA). His representatives also have threatened to impose tariffs on Mexico (and other countries). In what seems like the blink of an eye, these actions have sacrificed the valuable U.S. reputation–earned over seven decades since President Truman—as a trustworthy leader in the global fight for open, competitive markets.

Historically, government guidance of the economy has come in many forms...

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Steve Cecchetti and Kim SchoenholtzIndustrial policy, Comparative advantage, TPP, NAFTA, China, Mexico, Japan, MITI, International trade, Employment, Agriculture, Manufacturing, Services, Gains from trade, Productivity, Technological change, David Ricardo
Sources of growth: large and small, new and old

Everyone is pro-growth and pro-employment. So, when an economy stagnates and unemployment rises, there is always concern. In Europe, real GDP remains below where it was at the end of 2007. That is, the economies in the euro area and the broader European Union (EU) have not collectively returned to the level of economic activity they enjoyed more than six years ago!  Unsurprisingly, as the real economy has languished, unemployment across the EU has risen, going from a low of below 7% to its current level of 10.6%.

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Steve Cecchetti and Kim SchoenholtzGrowth, Employment, Credit, SMEs