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PeakTrader:

In the Fed’s dual mandate of maximum employment and price stability, maximum employment isn’t defined. However, price stability is defined as 2% annual inflation in the long-run.

So, it seems, the Fed leans towards price stability, more than maximum employment, which may be more difficult to define, and we can expect annual inflation around 2%.

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Also, I may add, ten year expected inflation has been in a steady decline, since the early 1980s. Chart:

http://www.clevelandfed.org/research/data/inflation_expectations/2014/March/image1.gif

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In the mid-1990s, Greenspan believed the economy could grow faster without accelerating inflation. The result was actual output exceeded potential output and the country was beyond full employment (the annual unemployment rate fell to 4.0% in 2000). Moreover, in the mid-2000s, actual output reached potential output and the country reached full employment (the unemployment rate fell to 4.6% in 2006 and stayed at 4.6% in 2007).

The Fed takes into account many factors that influence inflation and employment. Moreover, the Fed works in the future economy, because of lags in the adjustment process.

If you feel the 99% didn’t benefit enough, it’s ridiculous to blame the Fed. You need to look elsewhere. You can praise the Fed later.

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I stated before, The Fed creates and destroys money to achieve sustainable growth, which is optimal growth, and the Fed doesn’t micromanage the economy.

Since the easing cycle began in late 2007, the Fed stimulated growth by lowering interest rates for households and firms, along with creating a “wealth effect” (in asset markets) to induce demand and reduce saving, in the attempt to generate a self-sustaining cycle of consumption-employment (where consumption generates employment and employment generates consumption, etc.).

Moreover, the Fed raised “animal spirits” to facilitate nominal growth, which facilitates real growth.

However, a virtuous cycle of consumption-employment failed to take hold, because fiscal policy, and policies out of Washington, basically resulted in an economy that has one foot on the accelerator and the other foot on the brake, causing an expensive recoverless expansion.

The Fed has raised living standards for the masses substantially, ceteris paribus, because smoothing-out business cycles results in a higher level of growth. Economic boom/bust cycles are inefficient both in the boom and bust phases.

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I’ve explained before, raising the minimum wage, e.g. to $15 an hour, to compensate for low-wage productivity gains, is a pro-growth policy.

That growth will come from raising productivity and reducing other production costs, resulting in faster GDP growth, not necessarily more employment, which empirical studies support. However, it’s likely, the positive income effect will be greater than the negative employment effect to generate some employment through consumption.

Raising the minimum wage, in itself, will likely have a small impact on employment. So, there are other factors holding the economy back.

And, from prior comments, there seems to be some confusion about potential and actual output. Potential output can be measured as a 10-year moving average of actual output, for example, or using an OLS estimate. Nonetheless, actual output has been well below potential output over the past few years, using a 60-year linear regression. Chart:

http://www.advisorperspectives.com/dshort/updates/Real-GDP-Per-Capita.php

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“…we are now in the long-run of monetary policy.”

That’s not true. The U.S. economy downshifted very quickly. It has underproduced by up to $1 trillion a year, since the economy peaked in 2007.

There has been some demographic changes that reduced potential output over the past few years. However, that would take place slowly, not quickly.

We’re on a path where the destruction of potential output with the slow rise in actual output will eventually close the output gap and permanently shrink the U.S. economy.

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