What economic goals does the Federal Reserve seek to achieve through its monetary policy?
The Federal Reserve works to promote a strong U.S. economy. Specifically, the Congress has assigned the Fed to conduct the nation’s monetary policy to support the goals of maximum employment, stable prices, and moderate long-term interest rates. When prices are stable, long-term interest rates remain at moderate levels, so the goals of price stability and moderate long-term interest rates go together. As a result, the goals of maximum employment and stable prices are often referred to as the Fed’s “dual mandate.”
Maximum employment is the highest level of employment or lowest level of unemployment that the economy can sustain while maintaining a stable inflation rate. Over the past few decades, experience has shown that it is possible to keep unemployment low and the jobs market strong without leading to an unwanted increase in inflation. For example, in the economic expansion following the Great Recession, as unemployment fell below estimates of what was thought to be sustainable, the jobs market proved remarkably adaptable. This resulted in many benefits and opportunities to families and communities that all too often had been left behind. Building on that, a low level of unemployment, absent other risks, will not by itself be a cause for concern. Of course, when unemployment is high, the Fed will actively seek to lower it. For this reason, the Fed seeks to mitigate shortfalls of employment from assessments of its maximum level.
Prices are considered stable when consumers and businesses don’t have to worry about rising or falling prices when making plans, or when borrowing or lending for long periods. The Federal Open Market Committee (FOMC) judges that inflation rate of 2 percent over the longer run, as measured by the annual change in the price index for personal consumption expenditures, is most consistent with the Federal Reserve’s mandate. To best achieve this longer-run goal, the FOMC seeks to achieve inflation that averages 2 percent over time. When households and businesses can reasonably expect 2 percent inflation over the longer run helps them make sound decisions regarding saving, borrowing, and investment, thus contributing to a well-functioning economy.