How often does the Fed actually achieve its dual mandate — price stability and maximum employment?
How often does the Fed actually achieve its dual mandate — price stability and maximum employment?
It’s been a roller coaster of a week for the U.S. stock market, and markets around the world. And it’s only Wednesday.
Before Monday’s big sell-off, anxiety was already building, particularly among economists, that the Federal Reserve may have waited too long to start cutting interest rates. July’s jobs report was weaker than expected, though the unemployment rate, at 4.3%, is still low by historical standards.
After Monday’s market drop, the sense of urgency rose. It’s time, the consensus seems to be now, for the Fed to cut rates at its next meeting in September. Even though inflation is not yet back down to the Fed’s target rate of two percent.
That’s because inflation, or price stability, is only one part of the Fed’s job, its dual mandate. The other is maximum employment, a strong job market.
Achieving both at the same time is a tall order. Maintaining both for very long, a delicate balance. How often, since the dual mandate became official in the 1970s, has the Fed managed to do it?
“It’s kind of a tough question,” said Michael DeDad, an assistant professor of economics at the University of Akron. “Because it’s hard to say what exactly it means to achieve the dual mandate, since it’s kind of vaguely written. Achieving price stability and maximum employment. What exactly is maximum employment? What exactly is price stability?”
For the last decade or so, the Fed has defined price stability as two percent inflation. That’s the goal. Maximum employment is a little murkier.
“That’s not a number, that’s a concept,” said Ann Owen, an economics professor at Hamilton College.
The idea, effectively, is to get the unemployment rate as low as it can go without causing inflation to rise. If unemployment gets too low, there’s a risk that businesses might start raising wages to compete for workers, and eventually also raise prices to cover their higher labor costs, which could trigger a wage-price spiral. Which, of course, the Fed does not want.
But what is that Goldilocks unemployment rate that corresponds with a maximum, sustainable level of employment?
There isn’t one. It’s always changing, because the economy is always changing. Which is why, Owen said, “it’s very difficult, in the current moment, to know, ‘yes, we’ve hit the sweet spot.’”
Looking back, though, it’s easier to say, yes, at X point in time, the economy was, in fact, in that sweet spot.
And in the last few decades, Kevin Jacques, a former economist with the Treasury Department, said the Fed has actually pulled off periods of both low inflation and maximum employment relatively frequently.
“There were some very good time periods in the 1990s where the Fed was able to achieve what we might think of as the dual mandate,” he said.
Stretches of time when the job market was strong and inflation was low. Similarly, in the early- to mid- 2000s, Jacques said, “after 9/11, after the bursting of the dot-com bubble, but before the financial crisis, you again had some nice periods there.”
The Great Recession, around 2008/2009, was decidedly not a good time for the economy — unemployment was too high and inflation, for a while, was maybe almost too low.
But then again in the 2010s, he said, “once you got past the financial crisis but before the pandemic hit, a long stretch there where you’ve got low unemployment rates, low inflation.”
And where you could say that the Fed had, once again, more or less achieved its goals.
So what about today? Right now?
Michael DeDad at the University of Akron said if you look at recent economic data, “we’ve got still relatively low unemployment, we also have relatively low inflation compared to where we were two years ago.”
It’s still a bit above the Fed’s two percent target, and unemployment is ticking up, so maybe not quite there, he said, “but it seems like maybe they’re close.”
We may only know for sure in hindsight. And, if history is a guide, the economy may not stay in that sweet spot for very long.
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