The Anti-Economist — December 13, 2012, 3:47 pm

The Fed’s Historic Week

The Federal Reserve makes jobs a priority at last

On Wednesday, the Federal Reserve announced a target of 6.5 percent unemployment, marking a long-overdue change in policy: for the first time, it was outlining jobs as a specific objective. This development took quite some time. The 1978 Humphrey-Hawkins Act explicitly called for the Fed’s goals to be low inflation and low unemployment, yet the Fed didn’t even mention unemployment in its statements until 2010. Wonder why we have a jobs emergency in America? That’s a big part of the reason.

For more than thirty years, beginning with chairman Paul Volcker and extending through the long, now-tarnished reign of Alan Greenspan and the first few years of Ben Bernanke, the Fed has neglected employment. In fact, Fed chiefs tended to see a relatively high unemployment rate as critical to their objective of controlling inflation. If the rate stayed high while they pursued their inflation targets — usually about 2 percent a year — so be it.  Until the late 1990s, the result was unnecessarily high interest rates, and therefore slow rates of growth.  

The Fed didn’t put it that way, of course.  It claimed that if the unemployment rate wasn’t above a certain level, inflation would inexorably rise. One consequence of the artificially high rate was the suppression of wage hikes.  Wage increases were widely thought to be a main driver of inflation, and an impediment to economic growth because they would undermine profits—never mind that wages rose handsomely and consistently through twenty-five years of heavy investment and rapid growth after World War II.

The new 6.5 percent target sends a message to the markets that interest rates will stay low until many more jobs have been created. Prior to this, the Fed pegged its low-rate quantitative-easing policies to specific time limits. Two problems remain, however.

First, the target isn’t low enough — the unemployment rate will fall significantly farther before it creates inflation.  An unemployment rate of 5.5 percent would cause the federal deficit to fall sharply due to economic growth alone.

Second, the Fed may not stick to its guns.  Keeping inflation in check is widely thought to be one of the Fed’s great achievements; to get the economy back on track, it will have to stand up to constant external and internal pressure to increase interest rates.

Inflation scares are the great refuge of conservatives, and of creditors who don’t want their loans to lose value. But these scares aren’t based on empirical studies or even decent theory.  The low unemployment rate of the 1990s — below 4 percent — did not generate inflation, for example. 

The Fed’s move doesn’t relieve the federal government of the need for additional stimulus funds, nor of the need to make targeted public investments in infrastructure and other areas. But if it follows through, it will represent a historic shift — one that bodes well for the economy in the months ahead.

Share
Single Page

More from Jeff Madrick:

Context July 16, 2015, 12:59 pm

A Deeply Integrated Europe

The euro and its discontents

Context July 10, 2015, 10:15 am

How Germany Reconquered Europe

The euro and its discontents

From the February 2014 issue

How Germany Reconquered Europe

The euro and its discontents

Get access to 165 years of
Harper’s for only $45.99

United States Canada

CATEGORIES

THE CURRENT ISSUE

May 2016

Fighting Chance

= Subscribers only.
Sign in here.
Subscribe here.

Front Runner

= Subscribers only.
Sign in here.
Subscribe here.

The Habits of Highly Cynical People

= Subscribers only.
Sign in here.
Subscribe here.

Unhackable

= Subscribers only.
Sign in here.
Subscribe here.

American Imperium

= Subscribers only.
Sign in here.
Subscribe here.

view Table Content

FEATURED ON HARPERS.ORG

Post
Elisabeth Zerofsky on Marine Le Pen, Paul Wachter on the quest for an unhackable email, Rebecca Solnit on cynical people, Andrew J. Bacevich on truth and fiction in the age of war, Samuel James photographs E.P.L. soccer, a story by Vince Passaro, and more

I sat in a taxi with Emma and her son, Stak, all three bodies muscled into the rear seat, and the boy checked the driver’s I.D. and immediately began to speak to the man in an unrecognizable language.

I conferred quietly with Emma, who said he was studying Pashto, privately, in his spare time. Afghani, she said, to enlighten me further.

Illustration by Taylor Callery
Article
Front Runner·

= Subscribers only.
Sign in here.
Subscribe here.

"The F.N. asked to be sent to an institution whose legitimacy it did not accept, and French voters rewarded the party with first place in the election."
Illustration (detail) by Matthew Richardson
Memoir
I Am Your Conscious, I Am Love·

= Subscribers only.
Sign in here.
Subscribe here.

A paean 2 Prince
"And one thinks, Looking into Prince's eyes must be like looking at the world."
Photo ©© PeterTea
Article
Stop Hillary!·

= Subscribers only.
Sign in here.
Subscribe here.

"As wacky as it sometimes appears on the surface, American politics has an amazing stability and continuity about it."
Article
Plexiglass·

= Subscribers only.
Sign in here.
Subscribe here.

I sat in a taxi with Emma and her son, Stak, all three bodies muscled into the rear seat, and the boy checked the driver’s I.D. and immediately began to speak to the man in an unrecognizable language.

I conferred quietly with Emma, who said he was studying Pashto, privately, in his spare time. Afghani, she said, to enlighten me further.

Photograph (detail) by Karine Laval

Average number of pounds of pennies in an American home:

6

There were new reports of cannibalism in North Korea.

The Finnish postal service announced it will begin mowing lawns on Tuesdays.

Subscribe to the Weekly Review newsletter. Don’t worry, we won’t sell your email address!

HARPER’S FINEST

Mississippi Drift

By

Matt was happy enough to sustain himself on the detritus of a world he saw as careening toward self-destruction, and equally happy to scam a government he despised. 'I’m glad everyone’s so wasteful,' he told me. 'It supports my lifestyle.'

Subscribe Today