Sense on Cents

Navigating the economic landscape brings us down new and varied paths. In going down these paths, will we be able to double back and return to the main road of prudent fiscal and monetary disciplines in both the public and private sector? I am not so sure. I am also not so confident that our government officials and central bankers fully appreciate the implications of their policies and statements. I saw evidence of that just yesterday. Where? How so? Let’s navigate into the domain of the Federal Reserve.

What are the stated goals of the Federal Reserve? From the Fed’s website, we learn the following:

What are the goals of U.S. monetary policy?

Monetary policy has two basic goals: to promote “maximum” sustainable output and employment and to promote “stable” prices. These goals are prescribed in a 1977 amendment to the Federal Reserve Act.

What do maximum sustainable output and employment mean?
In the long run, the amount of goods and services the economy produces (output) and the number of jobs it generates (employment) both depend on factors other than monetary policy. These factors include technology and people’s preferences for saving, risk, and work effort. So, maximum sustainable output and employment mean the levels consistent with these factors in the long run.

So that’s why the other goal is “stable prices”?
Yes. Price “stability” is basically a low-inflation environment where people and firms can make financial decisions without worrying about where prices are headed. Moreover, this is all the Fed can achieve in the long run.

Fed-watchers monitor Fed actions to detect how disciplined our central bank is in pursuing these goals. There are always those who will critique the Fed for being too hawkish or dovish in its monetary policy in pursuit of these goals. (more…)