Targeting Unemployment - The Federal Reserve's Failed Mandate

A recent bill proposed by Michigan Representative John Conyers looks at how the government could introduce legislation that would strengthen one of the Federal Reserve's two mandates.  As most of us are aware, the Fed has a dual mandate which was established by Congress in Section 2A of the Federal Reserve Act as shown here:

"The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." (my bold)

You will notice that nowhere in this dual mandate does it say anything about the specific level of unemployment and inflation that are expected from the Federal Reserve.  It just states that the Fed is expected to implement policies that will both maximize employment and minimize inflation.

As I noted above, Representative John Conyers and his Congressional Full Employment Caucus members introduced the "Full Employment Federal Reserve Act of 2015" otherwise known as H.R. 3541.  Here is the text of the bill:

Please note that in its key section, the bill recommends that Section 2A of the Federal Reserve Act be amended to state:

"(1) by inserting “(defined as an economy with an unemployment rate of not more than 4 percent and that generally includes a labor market in which median wages are rising with worker productivity, job seekers can find work, and involuntary part-time work is at a minimum)” after “maximum employment”; and

(2) by striking “stable prices” and inserting “a stable rate of inflation”." (my bold)

In amongst the legalese, the H.R. 3541 makes some interesting points.  The bill refers to the divergence between wages and productivity, something that we can see quite clearly on these graphs from the Economic Policy Institute:

It also mentions the dropping workers' share of business income which is quite clear on this graph:

Obviously, an economy that has suffered from less than full employment since the Great Recession will have a negative impact on worker incomes which ultimately has a negative impact on the economy as a whole.

Just in case you think that the 4 percent target rate for unemployment is ridiculously low, here is a graph showing what the headline unemployment rate looked like between 1996 and 2007:

An unemployment target rate of 4 per is quite achievable given that the U-3 rate hovered around the 4 percent level for a full year during late 1999 and late 2000.

Now, let's see what the Federal Reserve thinks of H.R. 3541.  In Janet Yellen's much-followed speech of September 28, 2015, the following footnote was attached:


"In contrast, the FOMC has determined that a number of considerations preclude it from setting a fixed numerical target for the other leg of its dual mandate, maximum employment. As discussed in its Statement on Longer-Run Goals and Monetary Policy Strategy (see note 1), the maximum level of employment is something that is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. Moreover, the maximum level of employment, the longer-run "natural" rate of unemployment, and other related aspects of the labor market are not directly observable, can change over time, and can only be estimated imprecisely. As a result, views vary about what labor market conditions would be consistent with a normal level of resource utilization." (my bold)

Obviously, the current Chair of the Fed believes that it is not necessary (or practical, for that matter) to implement the unemployment targets set in Rep. John Conyer's recent bill because the maximum level of employment is largely determined by "non-monetary factors", that is, it is out of the reach of the Fed's monetary arsenal.

Certainly, it would be difficult for the great economic  minds at the Federal Reserve to pick an unemployment number out of thin air and try to stick to it like they have with inflation (and, might I add, rather unsuccessfully).  So, while the Fed is quite willing to set its inflation target policy in stone, it is unwilling to do the same for unemployment.  Perhaps this is why:

The headline U-3 unemployment rate appears to be a very poor representative of what is happening on Main Street America.

It is quite obvious that millions of Americans would agree that the Federal Reserve has failed spectacularly at the employment part of its two-pronged mandate.  Despite Ms. Yellen's protest to the contrary, there is no reason why the Federal Reserve's mandate could not include an unemployment target similar to the seemingly random target that it has adopted for inflation.  At the very least, it would make it easier for all of us to better understand whether there is a good reason for the Fed to implement further monetary policy adjustments, particularly when the time is right to let interest rates rise.  Without a complete measuring stick, their guess is as good as ours.