By Matthew Kerkhoff
If the Fed raises rates this year, it’s going to be done to test the waters, rather than the usual motivation of chasing down inflation and an overheating economy.
Let’s go back to the basics for a moment. The Fed’s statutory dual mandate dictates that they manage monetary policy to achieve two goals: promote maximum employment, and achieve price stability.
Following their January 2012 meeting, the Federal Open Market Committee (FOMC) issued a statement indicating that they judge an inflation rate of 2%, as measured by the annual change in personal consumption expenditures (PCE), to be most consistent with the price stability mandate. Setting a specific target helps the Fed achieve this goal by anchoring longer-term inflation expectations across markets.
Promoting maximum employment is a vaguer objective, and the Fed does not specify a fixed goal for what is considered maximum employment. Instead, this mandate relies on the relative position of ... Log in or subscribe to continue reading.