Federal Open Market Committee(FOMC) released its statement Wednesday night, in which claims that “To support continued progress toward maximum employment and price stability, the Committee reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate“. Given the statutory mandate of FOMC is to foster both maximum employment and price stability, what I am interested in is that why the committee usually focuses on the federal funds rate but seldom set an employment rate target.
Its official story (as well as some economics principles) is as following: Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-time interest rates, the amount of money and credit, and , ultimately, a range of economic variables, including employment, output, and prices of goods and services. However, since the ultimate goal is to rise the inflation gradually toward 2 percent (as the year of 2015) and decline the unemployment, why not simply set up an appropriate employment rate directly. And personally I think that reaching an employment rate target is much more easier (or say, controllable) compared with this “chain reaction”.
First of all, employment rate is easier to measure. The unemployment is defined when people are without work and actively seeking work, whose rate is simply the number of unemployed people divided by whole labor force. And it can be found easily through Bureau of Labor. Then the employment rate is simply one minus the unemployment rate. On the other hand, inflation is an index number, which is calculated usually through CPI (Consumer Price Index), another index number that combines prices of a basket of goods. What is more, when calculating inflation rate, we also have to take the base-year’s condition into consideration. Thus inflation is a more illusionary and imprecise indicator.
Secondly, based on the Phillips Curve, the inverse relationship between unemployment rates and corresponding rates of inflation indicates that once the employment rate is settle down, inflation rate is almost determined as well. Thus what we need to do is set up an employment rate and try to target it. And then the rest is waiting the market to decide the inflation rate ,which should not be far away from ‘normal’. Someone may argue that the inverse relationship does not necessarily mean a causality between the unemployment and inflation. Well, though it is true and the adaptive expectation theory has already pointed out the inflation is determined by the expectation, in the short term the Philips Curve still dominated.
Finally, since labor is one of the four basic factors of production(the other three are land, capital and entrepreneurship), an increase in the employment rate could indicate a real development on production(GDP). While inflation is usually considered to be connected with over-printed cash problem. Though a mild inflation is good for stimulating economic, creating jobs not only stimulating economic, but also good for social stability.
I guess one problem of targeting on employment rate instead of federal fund rate is that while setting up an employment rate is much more easier and personally thinking is much more effective for waking up the economic, reaching the goal is difficult. FOMC could target its federal fund rate through open market operation, while it is hard to create jobs for unemployment people. In this case, U.S might want to learn from China who creating some “Zipper project”, such as reconstruction buildings and rail roads, or waging foreign wars. Anyway, the key is trying variety means( we could call them ‘open labor market operation’) to target the employment rate.