The Fed Plans to "Overshoot" the Target for Max Employment
Fed Chair Jerome Powell laid out our targets for our future at the September 16 Federal Open Market Committee meeting. “Accommodative stance” on monetary policy, up to 0.25 percent interest rates until maximum employment, plus a moderate overshoot of the 2 percent inflation target all must be met. Clearly, there is no plan to ever stop monetary stimulus.
He didn’t explicitly say this, nor would he. But, per his guidance and Q&A, conclusions can be made. Maximum employment for example:
We are assigned maximum employment. Now what does that mean? As I mentioned earlier, it doesn't mean a particular headline unemployment number. What it means is maximum employment.
Unemployment rate? Not much substance offered there:
I can't be precise about a particular number, but let me just say there was a lot to like about 3.5 percent unemployment. It's not a magic number. No one would say that number is the touchstone or that is, you know, maximum employment.
Touchstone? Curious what number that would be. Upon further questioning, he clarified that maximum employment is “not something which could be reduced to a number.” Apparently, the Fed will determine when that goal is reached. However, support does not end once employment is met.
Regarding that inflation target, Powell informs us:
Even after -- if we do lift off, we will keep policy accommodative until we actually have a moderate overshoot of inflation for some time.
Interesting to note the consensus in the Fed’s statement of economic projects: inflation won’t reach 2 percent until 2023; even then the highest projection made is 2.4 percent, hardly an overshoot. However, Powell remained steadfast:
In terms of inflation, you know, this is a Committee that is both confident and committed and determined to reach our goals. And the idea that we would look for the quickest way out is just not who we are….Okay, so just understand that, you know, we're strongly committed to achieving our goals and the overshoot.
How much more could be done to keep policy “accommodative?” Aren’t they out of ammunition? The Chair gives a definitive NO.
I certainly would not say that we're out of ammo, not at all. So first of all, we do have lots of tools. We've got the lending tools. We've got the balance sheet, and we've got forward guidance…
Translation: new Fed/Treasury bailouts, more bond buying, eventually equity purchases, and, of course, more statements extolling the virtues of maximum employment and inflation. But, it could also mean negative interest rates in the future.
Again, he will never outright say this, but accommodative monetary policy inevitability takes over nations. We are already seeing this across the globe. Why should the Fed be any different? These policies and goal settings carried out by central banks go by many names: interventionism, socialism, anticapitalism. They create asset bubbles and boom/bust cycles, but the Fed tells us their work is necessary to “provide relief” and “support recovery” as long as needed.
They have explicitly stated that interest rates will stay low for the next several years and this “accommodative stance” will continue at least until maximum employment is met with a consistent overshoot of inflation. Looking back on the last ten years, if price inflation was only around 1 percent, we could hardly imagine a decade of inflation being around two to five, seemingly the ballpark for which they are striving. As for maximum employment, it’s a target that cannot be measured nor particularly articulated. It appears nothing more than a carrot on a stick, intended to continue on a path which has a nearly unattainable end goal. But which is worse, the Fed somehow meeting their goals or continually falling short?