From San Francisco Fed President John Williams: The Economic Outlook and Challenges to Monetary Policy. A few excerpts:
In considering what maximum employment
is, economists look at the unemployment rate. We tend to think of
maximum employment as the level of unemployment that pushes inflation
neither up nor down. This is the so-called natural rate of unemployment.
It is a moving target that depends on how efficient
the labor market is at matching workers with jobs. Although we can’t
know exactly what the natural rate of unemployment is at any point in
time, a reasonable estimate is that it is currently a little over 6
percent.5 In other words, right now, an unemployment rate of about 6 percent would be consistent with the Fed’s goal of maximum employment. In terms of the Fed’s other statutory goal—price stability—our monetary policy body, the Federal Open Market
Committee, or FOMC, has specified that a 2 percent inflation rate is most consistent with our dual mandate.
Committee, or FOMC, has specified that a 2 percent inflation rate is most consistent with our dual mandate.
So, how are we doing on these goals? As I
said earlier, the economy continues to grow and add jobs. However, the
current 8.1 percent unemployment rate is well above the natural rate,
and progress on reducing unemployment has nearly stalled over the past
six months. If we hadn’t taken additional monetary policy steps, the
economy looked like it could get stuck in low gear. That would have
meant that, over the next few years, we would make relatively modest
further progress on our maximum employment mandate. What’s more, the job
situation could get worse if the European crisis intensifies or we go
over the fiscal cliff. Progress on our other mandate, price stability,
might also have been threatened. Inflation, which has averaged 1.3
percent over the past year, could have gotten stuck below our 2 percent
target.
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