In contrast, most economists believe that central banks have little or no ability to directly affect employment. The effect of monetary policy actions on employment is indirect and stems from central banks’ ability to affect output growth in the short run and achieve price stability in the long run.Federal Open Market Committee ; Monetary policy ; Employment

Daniel L. Thornton

English

Research Papers in Economics

Economic SYNOPSES
short essays and reports on the economic issues of the day
2011 ■ Number 1
I
t is widely acknowledged that the Full Employment
and Balanced Growth Act of 1978 (the Humphrey-
Hawkins Full Employment Act) establishes price 
stability and full employment as national economic policy
objectives. The Act requires the Federal Reserve to conduct
monetary policy pursuant to achieving these two goals.
Historically, the Federal Open Market Committee (FOMC)
has been cautious not to state its policy objectives in terms
of either full employment or the unemployment rate, 
preferring instead to state its objectives in terms of price
stability and economic growth. This essay discusses the
statement of the FOMC’s objectives since the late 1970s
and its recent emphasis on maximum sustainable employ-
ment and asks whether this change reflects a fundamental
change in the FOMC approach to policy or is merely an
attempt to explicitly acknowledge its mandate.
The Humphrey-Hawkins Full Employment Act was
enacted on October 27, 1978, amid considerable debate
among economists and policymakers about the extent to
which the Fed (or any central bank) could control inflation.
Some argued that the Fed had complete control in the long
run, whereas others suggested that any central bank’s ability
to control inflation was limited. Paul Volcker became
Chairman of the Federal Reserve in August 1979, and
under his influence in October 1979 the FOMC changed
policy dramatically with the stated goal of significantly
reducing inflation. The success of this effort effectively
ended the debate. Indeed, most central banks have adopted
(either explicitly or implicitly) a numerical long-run infla-
tion objective.1
In contrast, most economists believe that central banks
have little or no ability to directly affect employment. The
effect of monetary policy actions on employment is indi-
rect and stems from central banks’ ability to affect output
growth in the short run and achieve price stability in the
long run. In the short run, expansionary monetary policy
causes interest rates to decline. All other things the same,
lower interest rates increase consumption and investment
spending (i.e., aggregate demand), which increases output
and, consequently, employment. Most economists believe
that the long-run levels of output and employment are
determined by economic fundamentals (productivity, tech-
nology, the saving rate, and so on), which are unaffected
by monetary policy. Hence, any effect of policy actions on
output—and therefore, employment—is temporary. Thus,
working to achieve price stability is all policymakers can
do to promote the objective of full employment. Former
Fed Chairman Alan Greenspan made this point in his
Congressional testimony on February 16, 2005, when he
said, “For our part, the Federal Reserve will pursue its statu-
tory objectives of price stability and maximum sustainable
employment—the latter of which we have learned can best
be achieved in the long run by maintaining price stability.”
This means that in the long run, maximum sustainable
employment and price stability are complements from a
policy perspective: If policymakers achieve the latter, they
have done the most they can to achieve the former.2
Until just recently, the FOMC has avoided references
to full employment or the unemployment rate in stating
its policy objectives. For example, at the conclusion of
each FOMC meeting the Committee votes on a policy
directive; this directive typically includes a statement of
the Committee’s policy objectives. The policy directive for
Paul Volcker’s first FOMC meeting (August 14, 1979) read,
“The Federal Open Market Committee seeks to foster
monetary and financial conditions that will resist inflation-
ary pressures while encouraging moderate economic expan-
sion and contributing to a sustainable pattern of interna-
tional transactions.”3 Neither maximum sustainable
employment nor the unemployment rate was mentioned.
A similar statement appeared in every policy directive
until the July 2-3, 1991, meeting. Then the directive was
modified slightly to read, “The Federal Open Market
Committee seeks monetary and financial conditions that
will foster price stability and promote sustainable growth
in output.”4
What Does the Change in the FOMC’s 
Statement of Objectives Mean?
Daniel L. Thornton, Vice President and Economic AdviserThe exclusive focus on price stability and economic
growth in the policy directive continued until December
2008. The October 28-29, 2008, policy directive began with
the statement, “The Federal Open Market Committee seeks
monetary and financial conditions that will foster price
stability and promote sustainable growth in output,” and
ended with the statement, “The Committee will monitor
economic and financial developments carefully and will
act as needed to promote sustainable economic growth and
price stability.”5 By contrast, the December 15-16, 2008,
directive began with the sentence used in the October direc-
tive but ended with “The System Open Market Account
Manager and the Secretary will keep the Committee
informed of ongoing developments regarding the System’s
balance sheet that could affect the attainment over time of
the Committee’s objectives of maximum employment and
price stability” [italics added].6 However, maximum employ-
ment was not mentioned in the FOMC’s policy statement,7
which read, “The Federal Reserve will employ all available
tools to promote the resumption of sustainable economic
growth and to preserve price stability.”8
These last two quoted sentences have appeared at the
beginning and end of each policy directive since December
2008; however, until the September 21, 2010, meeting, there
was no reference to the objective of maximum employment
elsewhere in the policy directive or in the FOMC’s state-
ment. The September statement read, “Measures of under-
lying inflation are currently at levels somewhat below those
the Committee judges most consistent, over the longer run,
with its mandate to promote maximum employment and
price stability” [italics added].9 Reference to the objective
of maximum employment was more prominent in both
the November 2-3, 2010, policy directive and the FOMC’s
policy statement. Both included the statement, “Consistent
with its statutory mandate, the Committee seeks to foster
maximum employment and price stability. Currently, the
unemployment rate is elevated, and measures of underly-
ing inflation are somewhat low, relative to levels that the
Committee judges to be consistent, over the longer run,
with its dual mandate.”10
It is not clear whether the direct reference to the objec-
tive of maximum sustainable employment reflects a change
in the FOMC’s belief regarding the extent to which its
actions can affect employment or merely reflects a desire
to explicitly recognize its mandate, perhaps motivated by
the fact that the unemployment rate remains unacceptably
high. In this regard, it is interesting to note that the unem-
ployment rate was 8 percent or higher from November 1981
to January 1984 without a significant change in the word-
ing of the FOMC’s policy directive. ■
1 Elsewhere I discuss reasons the profession might have reached this conclusion
based on the actions of European central banks and conclude that “At a bare
minimum, the U.S. experience accelerated the evolution to inflation targeting”
(p. 97). See Thornton, Daniel L. “How Did We Get to Inflation Targeting and
Where Do We Go Now? A Perspective from the U.S. Experience,” in David
Cobham, Øyvind Eitrheim, Stefan Gerlach, and Jan Qvigstad, eds., Twenty Years
of Inflation Targeting: Lessons Learned and Future Prospects. Cambridge, UK:
Cambridge University Press, 2010, pp. 90-110.
2 For other reasons to consider price stability and other policy objectives as
complements from a policy perspective, see Thornton, Daniel L. “Monetary
Policy Transparency: Transparent about What?” The Manchester School, September
2003, 71(5), pp. 478-97; and Thornton, Daniel L. “The Case for ‘Inflation First’
Monetary Policy,” Federal Reserve Bank of St. Louis Economic Synopses, No. 47,
December 12, 2009; http://research.stlouisfed.org/publications/es/09/ES0947.pdf.
3 Federal Reserve Press Release, September 21, 1979, p. 10.
4 Federal Reserve Press Release, August 23, 1991, p. 15.
5 Minutes of the Federal Open Market Committee, October 28-29, 2008, p. 10.
6 Federal Reserve Press Release, November 3, 2010.
7 The FOMC has released a statement at the conclusion of each meeting since
May 1999.
8 Federal Reserve Press Release, December 16, 2008.
9 Federal Reserve Press Release, September 21, 2010.
10 Minutes of the Federal Open Market Committee, November 2-3, 2010, p. 9.
Economic SYNOPSES Federal Reserve Bank of St. Louis      2
research.stlouisfed.org
Posted on January 3, 2011
Views expressed do not necessarily reflect official positions of the Federal Reserve System.
In contrast, most economists believe
that central banks have little or no
ability to directly affect employment.
The effect of monetary policy actions
on employment is indirect and stems
from central banks’ ability to affect
output growth in the short run and
achieve price stability in the long run.

What does the change in the FOMC's statement of objectives mean?

http://research.stlouisfed.org/publications/es/11/ES1101.pdf

What does the change in the FOMC's statement of objectives mean?

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