In a speech today to the Economic Club of Minnesota, Minneapolis Federal Reserve Bank President Naryana Kocherlakota reviewed the Fed’s new transparency policies (he supports them) and then reviewed the Fed’s role in maintaining “maximum” US employment. Keeping prices stable and maintaining maximum employment are the dual mandates of the US Fed.
Kocherlakota supports the bank’s increased transparency initiatives:
A transparent central bank is more accountable to the public because it is forced to be more disciplined in ensuring that its policy actions are in fact consistent with its policy objectives. When performance matches words, the public will have an even stronger belief in the central bank, which serves to anchor inflation expectations more solidly.
After presenting several charts and a discussion of Sweden’s experience in the early 1990s, Kocherlakota concludes:
For myself, I continue to pay close attention to the behavior of inflation. The term “maximum employment” in the statutory dual mandate is often interpreted as referring to the level of employment that is sustainable over the longer run without acceleration in inflation. Inflation was distinctly higher in 2011 than in 2010 and continues to run above the FOMC’s target of 2 percent.
Even core measures of inflation, which strip out energy goods and services, and food, went up notably. I see these changes as a signal that our country’s current labor market performance is much closer to “maximum employment” than the post-World War II U.S. data alone would suggest. As I’ve argued in the past, appropriate policy should be responsive to such signals.
Because the Fed mandate does not define “maximum employment”, Kocherlakota’s own definition appears to be 8% unemployment is pretty close. He may be willing to ratchet that down to 7%, but by then inflation might have rocketed up to 3% or even a little more. At that point the Republic will collapse.
Paul Ausick
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