–Danger in Overemphasizing Fed’s Full Employment Mandate
–Confident Fed Will Avoid Flawed Inflation Outcomes of 1960s

By Heather Scott

RICHMOND (MNI) – Richmond Federal Reserve Bank President Jeffrey
Lacker said Sunday the Fed’s last policy move made a clear distinction
between targeting a specific level of unemployment and flagging concern
over the slow pace of improvement in the jobs outlook.

He said the experience of the 1960s showed the danger of
overemphasizing the Fed’s full employment mandate at the expense of
stable prices, since once inflation takes hold it is difficult to bring
down.

In a speech prepared for a conference of high school advanced
placement economic teachers, Lacker said unemployment “has remained over
9.5 percent longer than at any time since the Second World War.”

And given the consensus for a “relatively slow recovery” he said
“progress toward more desirable rates of unemployment may continue to be
slow.”

He acknowledged that “the challenges have abated less rapidly than
I had hoped.”

However, Lacker cautioned that the experience of the 1960s when the
Fed waited to tighten monetary policy until unemployment had fallen to
an optimal level, unleashing a painful cycle of spiraling inflation that
was not defeated until the 1970s, shows “the danger of overemphasizing
the pursuit of ‘maximum employment.'”

“Monetary policy can alter unemployment only temporarily. Trying to
keep unemployment permanently lower than it otherwise would be, as was
the objective in the second half of the 1960s, is a recipe for
continually accelerating inflation,” he said.

The Fed’s Nov. 3 monetary policy statement made “the important
distinction that it is not the high level of unemployment alone that
motivated the action, but rather the slow pace of improvement and the
belief that further monetary stimulus could help,” Lacker said.

The current Fed understands the lessons of the past, rejecting the
idea of raising the inflation objective even temporarily, and he said
the latest statement “confirms this commitment by emphasizing its intent
to ensure that inflation remains consistent, over time, with its price
stability mandate.”

“So I am confident that we can and will avoid the inflation
outcomes that resulted from the flawed pursuit of full employment a half
century ago,” Lacker said.

But he added, “risks remain, especially those associated with
inadvertently creating false expectations that the Fed is preoccupied
with achieving a specific level of the unemployment rate.”

The Fed will need to manage those risks as the economy recovers and
it is called on again to tighten policy, even while unemployment remains
at a historically high level, he said.

Lacker said another lesson of the early 1960s and the Johnson
administration was that the Fed must “avoid entanglements with fiscal
policy.”

“Attempting to fine-tune monetary policy to offset shifts in the
stance of fiscal stimulus risks subordinating monetary policy to
short-term political considerations, to the detriment of independence,
credibility and the stability of inflation expectations,” he said.

** Market News International **

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