US Fed move to target unemployment places policy in an impossible situation
I find this move by the US Fed quite flabbergasting. It is admirable to link political policy to increase employment and reduce unemployment. However the US Fed is pledging low interest rates against both and inflation target, and an unemployment target.
It begs the obvious question. What happens when inflation goes over 2.5% and unemployment remains over 6.5%. The inflation target says increase interest rates, but that is confounded by the requirement of the unemployment rate to retain low interest rates.
Fed links rates to US unemployment | ft.com
The US Federal Reserve will keep interest rates at close to zero until unemployment falls below 6.5 per cent in a historic change to monetary policy.
It is the first time a large central bank has ever tied its interest rate policy directly to the state of the economy. The Fed said it will continue to forecast low rates provided its inflation expectations do not rise above 2.5 per cent.