Page 5 - ISQ - April 2022

INVESTMENT STRATEGY QUARTERLY

In January 2012, the Fed followed other central banks in formally
adopting a 2% inflation target (as measured by the Personal
Consumption Expenditures Price Index), although it had an The dual mandate of stable prices and maximum
implicit target of 1.7% to 2.0% before that. employment is taken largely as a single operational
objective – the job market will perform better over
The employment goal is maximum sustainable employment. the long run if inflation is low and stable.
There is no specific target for the unemployment rate. The belief
has been that using monetary policy to push the unemployment
rate lower would eventually lead to inflationary pressures. In fact, stood out was that low-income communities were very slow to
the dual mandate of stable prices and maximum employment is recover from the 2008 financial crisis. Black unemployment rises
taken largely as a single operational objective – the job market faster than white unemployment during a recession and falls more
will perform better over the long run if inflation is low and stable.
slowly in an economic recovery. The Fed made its employment
After a comprehensive public review, the Fed revised its monetary goal “broad-based and inclusive.” Maximum employment is viewed
policy framework in August 2020. One problem with the 2% as “not directly measurable and changes over time owing largely to
inflation goal was that it was seen by the markets as a ceiling non-monetary factors that affect the structure and dynamics of the
rather than a target. As a consequence, inflation would average labour market.” In setting monetary policy, the Fed assesses
less than 2%. In the revised framework, the Fed moved to a shortfalls in employment from its maximum level and considers a
flexible average inflation-targeting system. The long-term inflation wide range of labour market indicators.
goal remains at 2%, but following a period with inflation below
2% (as in the pre-pandemic years), the Fed would seek a period The Fed recognises that these goals may sometimes be in conflict.
with inflation moderately above 2%. Needless to say, the timing Under such circumstances, the Fed will make a judgement call
of the shift in the framework was terrible (given the increased based on how far away it is from each individual goal, and how
inflation pressure seen over the last year). long it would take to reach those goals.

In conducting its review, the Fed talked to a wide range of
businesses, academics, and the general public. One thing that MONETARY POLICY TOOLS
The primary tool for monetary policy is the federal funds rate, the

1 US
CENTRAL
BANK
The Federal
Reserve System

3
KEY
ENTITIES Federal Reserve 12 Federal Federal
Board of Reserve Open Market
Governors Banks Committee

5 Conducting Helping Supervising Fostering payment Promoting consumer
KEY the nation’s maintain the and regulating and settlement protection and
FUNCTIONS monetary policy stability of the financial system safety and community
financial system institutions efficiency development

Source: Federal Reserve

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