![]() Here is how the Fed describes some of the variables when assessing maximum sustainable employment: But the actual rate the Fed feels reflects maximum employment without overheating the economy depends on a complicated set of shifting dynamics. For the purposes of discussion and the ‘Goldilocks’ chart above, we used a range of 4%-6% unemployment. The Fed has explicitly stated that they target a 2% inflation rate over the long term, but their target for maximum sustainable employment is not as clearly defined. The dual mandate requires a delicate balancing act of supporting a relatively high employment rate, but not so high as to trigger a jump in inflation. ![]() When the Fed wants to cool an overheating economy to promote price stability, they use higher interest rates to slow growth. When unemployment is high and the Fed would like to spur the economy to encourage job creation, the Fed targets lower interest rates. For those of us who do, it is easier for us to recall from experience why avoiding excessive inflation is one of the Federal Reserve’s primary goals.Īlthough the term ‘Goldilocks’ is not officially in their mission statement, the goal of the Federal Reserve is to use monetary policy to support a stable economy by doing two things: maintain price stability and encourage maximum sustainable employment. hasn’t experienced sustained annual inflation above 3% for 30 years, roughly half of the country’s population does not have a significant inflationary period within their living adult memory. Graphics by Admiral Real Estate.īecause the U.S. Bureau of Labor Statistics,īoard of Governors of the Federal Reserve System World Bank. The orange band shows a range of 4%-6% unemployment, which for presentation purposes acts as a rough gauge of an employment market that is strong but not inflationary.ĭata Sources: FRED Economic Research – Federal Reserve Bank of St. In the chart below, the shaded pink band highlights a range of price stability, where CPI is in the 2% range. With the exception of the Great Recession and the recent COVID shock, relative equilibrium has become the ‘new normal’. The chart below gives a sense of just how much of recent history could be described as a Goldilocks economy. has enjoyed the relatively stability of a Goldilocks economy for much of the past 25 years. Some market observers are preparing for the possibility that “Goldilocks is dead.”Ī Goldilocks economy – one that is neither too hot nor too cold – achieves an ideal balance between strong employment, stable prices, and sustainable growth. The combination of rising national debt, pent up demand, and continued monetary and fiscal stimulus are stoking fears of inflation. The $1.9 trillion stimulus package will bring total COVID relief measures to $5 trillion, which all told will add a whopping 20% to U.S. Yesterday, President Biden signed into law the lastest COVID relief bill in an effort to help the economy recover from the effects of the pandemic.
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