The Federal Open Market Committee concluded its meeting Wednesday
August 1 with no change in its policy. They stated the following.
Consistent with its
statutory mandate, the Committee seeks to foster maximum employment and price
stability. The Committee expects economic growth to remain moderate over coming
quarters and then to pick up very gradually. Consequently, the Committee
anticipates that the unemployment rate will decline only slowly toward levels
that it judges to be consistent with its dual mandate. Furthermore, strains in
global financial markets continue to pose significant downside risks to the
economic outlook. The Committee anticipates that inflation over the medium term
will run at or below the rate that it judges most consistent with its dual
mandate.
To support a
stronger economic recovery and to help ensure that inflation, over time, is at
the rate most consistent with its dual mandate, the Committee expects to
maintain a highly accommodative stance for monetary policy. . . . The Committee
will closely monitor incoming information on economic and financial
developments and will provide additional accommodation as needed to promote a
stronger economic recovery and sustained improvement in labor market conditions
in a context of price stability.1
The Federal Reserve System has a responsibility to conduct
policy to achieve maximum sustainable output and employment and to promote
"stable" prices. These goals are prescribed in a 1977 amendment to
the Federal Reserve Act.2
This dual goal is seen by some as contradictory. They
believe that unemployment and inflation tend to move in opposite directions. A
contradictory and commonly held belief is that the inverse relationship is at
best temporary. The real impact of monetary policy is on inflation and the
impact on output and employment is at best temporary.
If you believe the inverse relationship exists, then the
lack of current inflation leads you to believe the Fed should be doing more to
spur the economy and reduce unemployment. If you believe the impact of
inflation is important and the impact on production is temporary, you are
concerned that the Fed’s recent actions will eventually lead to inflation. July
31 marked the 100th birthday of Milton Friedman. He died in 2006. Friedman’s
research led him to believe that inflation is determined by the actions of the
Fed and that the Fed has very limited ability to stimulate production and
reduce unemployment.
The current Fed seems to be trying to have it both ways.
Since inflation is low, they are pursuing an expansionary policy and are
prepared to make it more expansionary. While at the same time they say, “Don’t
worry, we can reverse the policy actions quickly if inflation becomes a
problem.” This is exactly the sort of belief that Milton Friedman argued
against. If he is right, we are eventually headed for trouble.
1. FOMC policy statement http://www.federalreserve.gov/newsevents/press/monetary/20120801a.htm
2. Fed policy targets http://www.frbsf.org/publications/federalreserve/monetary/goals.html
