The Bankwatch

Tracking the consumer evolution of financial services

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 |

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.

Written by Colin Henderson

December 12, 2012 at 19:17

Posted in Uncategorized

One Response

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  1. I’m way out of my depth here but what’s happening in the UK shows to me that conventional dogma doesn’t always follow.

    Interest rates were kept low with high unemployment and high inflation but low growth.

    Prices fell back because nobody felt like spending and inflation is down, employment is improving but the headline growth still looks bad but the trend is good.

    Maybe there is an extra parameter at work called ‘feel good’ factor which tilts people between saving and spending.

    The Scot Bicycle

    December 13, 2012 at 02:57

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