Nicholas Mangee: Fed is failing its dual mandate

Another great column from Armstrong economics professor Nicholas Mangee in the Savannah Morning News: Our economic times: Federal Reserve remains resistant on policy

The Fed has a dual mandate: to maximize employment and to keep inflation in check.

John C. Williams of the Federal Reserve Bank of San Francisco recently made these remarks:

Maximum employment is a moving target that depends on how efficient the labor market is at matching workers with jobs. It’s not a number you can measure directly. Economists fiercely debate what it might be. Expressed in terms of the unemployment rate, I estimate that maximum employment is currently around 6¼ percent.6 The current unemployment rate is far above that level, which means we are far short of maximum employment by any reasonable measure. What’s more, with the economy’s recent loss of momentum, job creation will barely keep up with labor force growth. As a result, I expect little progress toward maximum employment over the next year or more.

The second part of the Fed’s mandate is price stability. As I’ve noted, our policy body, the Federal Open Market Committee, has specified that a 2 percent inflation rate is most consistent with maximum employment and price stability. Over the past year, prices rose 1.5 percent, according to the Fed’s preferred measure of inflation. Falling commodity prices, a rising dollar, and subdued labor costs suggest that inflation will fall to around 1¼ percent this year and then rebound somewhat to about 1¾ percent next year.

What does this mean for the Fed? We are falling short on both our employment and price stability mandates, and I expect that we will make only very limited progress toward these goals over the next year. Moreover, strains in global financial markets raise the prospect that economic growth and progress on employment will be even slower than I anticipate. In these circumstances, it is essential that we provide sufficient monetary accommodation to keep our economy moving towards our employment and price stability mandates.

From Mangee’s column today:

Given such projections by the people who ultimately decide on monetary policy, how can the Federal Reserve just sit on its hands with so many people entering long-term unemployment? Wouldn’t helping to put hundreds of thousands of people back to work take precedent over the possibility of a slight increase in the price level, one that appears far from certain and perhaps even desirable?

You’ll hear folks say that the Fed has done all that it can do, but it hasn’t. The bank needs to be even more aggressive. Given so much slack in the economy, we’ll have plenty of warning if inflation starts to rise; the Fed will can easily respond as needed.

We’re spending too much time worrying about speculative negative results of Fed action while tolerating current conditions that should be intolerable.