Federal Reserve

Fed Adopts Employment, Inflation Targets


Welcome to the Era of the Fed: As Congress and the White House remain deadlocked in fiscal cliff negotiations, the Federal Reserve has announced a major new policy it says is intended to reduce unemployment. After commiting to an open-ended third round of quantitative easing (QE3) in September, the Fed now says it will continue to expand its balance sheet until the economy hits certain, predetermined targets.

In an announcement today, the Fed said that it plans to continue to keep interest rates low until unemployment drops to 6.5 percent, or until inflation hits 2.5 percent. In theory, then, there are controls either way: Too much inflation and the Fed will adjust rates accordingly; otherwise, rates will continue until unemployment drops to its target. Via Business Insider, here's the crucial bit from the Fed's statement: 

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

The Fed also announced that it would increase its monthly bond-buying commitment, adding $45 billion per month in Treasury bonds to the $40 billion in mortgage bonds it was already purchasing as part of QE3.

With the first two rounds of QE, the Fed set end points, essentially saying: We'll trying this for a certain amount of time and see if it works. With the open-ended third round, the Fed's message was: We'll try this until it works. Now what the Fed is doing is defining what "works" actually means. In this case, it's 6.5 percent unemployment. 

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  1. The beatings will continue until morale improves!

    1. Or until you don’t care about morale anymore, you just want the beatings to stop and will do whatever you’re told.

      1. I thought that was what “until morale improves” meant.

  2. In other words, the Fed has no control either way, so just pick a random number and keep printing money until that number changes.

    1. I like to think the Fed meetings are like the writing room at Family Guy: you got a bunch of mannatees pulling ping pong balls out of a spinning wheel with inflation and monetary targets written on them.

      1. The tried and true method of FDR:
        Setting the price of gold

  3. Inflation and unemployment?
    Why not add other government provided stats to base their decisions on? How about pear production and foia requests to the Dept. of Commerce? Or an index of crime levels in Chicago and Idaho Falls and global temperture increases over the last twenty minutes?

    We’re Argentina with better sports facilities!

    1. The best sports facilities!

  4. I personally think we should applaud the Fed for it’s generosity in adopting those 2 orphan government statistics, especially in this weak economy. Why under the Feds guardianship I think we could be looking at another Little Orphan Annie story. Just think any day now the inflation index will go on President Obama’s radio show and lift the entire coutries spirits by singing the Sun Will Come Out Tomorrow.

  5. Its now official Fed policy to expand the money supply by just over $1TT per year.

    I’m dying to see what they do when unemployment remains above their target rate, and inflation starts to slip the leash. Will they keep printing into an inflationary environment?

    But let’s not kid ourselves. This isn’t really about unemployment or inflation. Its about funding the federal deficit, because that’s where those newly printed bux are going. As long as we have $1TT deficits, we will have $1TT monetization of those deficits.

    1. hmm… invest in land. or something or ‘nother.

      1. Real property is going to be HOT in the near future. Buy, buy, buy!

    2. R C Dean| 12.12.12 @ 2:35PM |#

      Its now official Fed policy to expand the money supply by just over $1TT per year

      I learn something new every day. I work in finance, and I’ve never even bothered to consider what the abbreviation of Trillion really was.

      Actually, it’s “Tn”, not “TT”. Although it did me good to think of new TTs, ever-expanding…

  6. All part of a Five Year Plan.

    1. A Great Leap FORWARD.

      1. Traktorz!!
        Lots of Traktorz!

  7. I can see 6.5% unemployment – once they push enough potential job seekers off of the list.

    1. Maybe the Fed should control income tax rates too. Extraordinary measures for extraordinary times and such.

      1. Inflation is a kind of income tax…

        1. I think of it as more of a savings tax. I guess it’s an income tax in that you can’t renegotiate your salary as often as the market can renegotiate the value of your money…

  8. So wait…

    The only reason that people didn’t all have good, lucrative jobs in Zimbabwe is that they didn’t print enough money?

    I see! Now it all makes sense.

    Someone tell Krugman!

  9. I am supremely confident in the Fed’s ability to dramatically increase both unemployment and inflation.

  10. “We’ll try this until it works”

    I recall Einstein having a similar thought re: Insanity

  11. Let’s see.


    Fed has already about 1.6 trillion in treasury debt, which has already been or is now being spent by the government and so out in the economy. But someone (banks) had to give up digital cash and forego spending (and credit expansion) to buy those treasuries being issued. As spendable dollars in aggregate, it would be a wash were it not that usually to increase the money circulating the Fed just buys these treasuries from banks with digital printing press dollars, which then go about buying real stuff (and supporting credit expansion). That’s your classic monetary inflation, which is supposed to lead eventually to taking up the slack in the economy and to general price rises (and be detected in the CPI). But these days, about the same amount that the Fed holds in treasuries is sequestered in bank reserves ? and earning interest to boot. It is not circulating.

    If the Fed wanted to hit an inflation target, would not a simple measure be to stop paying interest on Fed Reserve reserves? Even to start charging a fee to hold those excess reserves?

    But, of course, the Fed standing ready to buy treasuries is thought to be keeping low the interest the Treasury has to pay to raise cash to fund Julia and other worthy causes. It sterilizes the digital cash it creates out of thin air to buy these treasuries by keeping them in bank excess reserves.

    So does the Fed really want to hit an inflation target?

    1. The way I read this article is that the Fed is targeting unemployment primarily and will only start targeting inflation if inflation gets above 2.5%. I’m sure the reason they even put these numbers out there is because they don’t want everyone to think that the pumping will go on forever. Eventually it will end, for better or for worse.

  12. So, uh, how does inflation cause employment again?

    1. Who in hell you think runs all those printing machines?

  13. I guess you could say that unemployment needs to go South of the Border. Which by the way is where the P.O.S. Bernanke still belongs.

  14. So if Congress sets the minimum wage too high, causing unemployment, the Fed will devalue the currency so that the minimum wage is now low enough to employ people.

    Why have TWO expensive systems in place when having ZERO systems at all will accomplish the same thing?

    Oh yeah, politics. I forgot. Put up expensive appearances of doing something which actually not only accomplish nothing but are more than likely harmful.

  15. I think the food is the most important thing in the world.

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