The Federal Reserve last week announced a new round of so called quantitative easing, or QE3, in an attempt to boost the still sluggish economy. The Fed, for the first time, opened the door to continuous easing until labor market conditions improve.
Republicans predictably took issue with the move (even as they admitted that it could be good for economic growth). But in a speech today, New York Federal Reserve President William Dudley defended the Fed’s action, saying that it is consistent with the Fed’s mandate to produce full employment:
In my view, the decision to ease policy further is fully consistent with our dual mandate and policy framework. As I mentioned earlier, we have two goals—to promote maximum employment and price stability. We therefore seek to minimize how far employment is from its long run normal level and inflation is from our longer-run goal of 2 percent on the PCE measure. […]
Looking ahead, in the absence of further monetary easing, I concluded that growth would remain too subdued over the next several years to make big inroads into the spare capacity that remains from the Great Recession. As a result, unemployment would remain unacceptably high, with economic risks skewed to the downside. Meanwhile, with substantial slack in labor markets and inflation expectations stable, inflation was likely to remain a bit below our 2 per cent longer-run objective.
In this situation, I concluded that our policy framework means that further monetary policy easing was appropriate provided that the benefits of using the tools available outweighed the costs.
As ThinkProgress has noted, the Fed has consistently failed to meet its dual mandate of low inflation and full employment, as inflation has stayed low but unemployment has remained high. Federal Reserve Chairman Ben Bernanke estimated that the first two rounds of quantitative easing created two million jobs.