The Recovery The Fed Wants

Today’s Federal Reserve Open Market Committee statement is, I think, the clearest sign yet that the United States is currently enjoying (or “enjoying” as the case may be) roughly the recovery that the Fed wants. The economy is not in recession. It does not appear to be likely to enter a recession. Were we starting from a decent point, a growth rate of 2.5 percent would be perfectly respectable. Many developed economies would consider themselves quite fortunate to have continual 2.5 percent RGDP growth and moderate inflation. The FOMC says that it “continues to expect a moderate pace of economic growth over coming quarters,” which is generally about what you want.

Now of course we’re not starting from a decent point. We’re starting from a steep labor market recession. My view is that means we need to be aiming for a period of rapid catch-up growth to reduce unemployment and restore the economy to full capacity. But the FOMC meekly “anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.” If the unemployment rate is not currently at a level consistent with the mandate and is also not converging rapidly toward a level consistent with the mandate, then in my view the FOMC ought to do something new and dramatic in order to fulfill its mandate. Instead, the FOMC is standing pat. They think 9.1 percent unemployment and moderate growth is fine and they don’t intend to do anything about it.