FOMC Rewind: Fed Updates Long-run Employment and Inflation Goals

The Fed wrapped up an extensive review of its monetary policy strategy, tools, and communication practices with an update to the long-term goals for employment and inflation. What does that mean for you? Let’s rewind.

Inflation goals

Employment goals


Part 1: Inflation goals

Ellen: Hey there! Why is the Fed trending right now?

Renuka: Oh yeah, they adjusted how they target inflation

Ellen: Target inflation? What does that mean?

Renuka: It’s a way to think about how to keep prices stable

Renuka: That’s one of the Fed’s main goals

Ellen: So what’s the target?

Renuka: For years the Fed has aimed for 2% inflation

Renuka: But it’s been below that

Renuka: So they will make up for the lows sometime in the future

Ellen: How does that work?

Renuka: When inflation starts to rise, it’ll be okay if it stays a bit above target for a while

Renuka: To average out for times when it was low

Ellen: Got it. But why change now?

Renuka: The economy has changed

Renuka: So it makes sense to rethink the best way to meet the goal

Ellen: How is the economy different?

Renuka: Inflation doesn’t respond to the economy like it used to

Renuka: So it’s often below the Fed’s target

Ellen: And the change will help?

Renuka: Yeah! That way people can be sure prices will stay stable

Renuka: And that helps the economy grow

Ellen: Ah ok, thanks!

Renuka: Any time!

Part 2: Employment goals

Sean: Hey Shelby! Does the Fed have anything to do with jobs?

Shelby: Oh yeah! One of the Fed’s main goals is maximum employment

Sean: What does maximum employment mean?

Shelby: That’s something the Fed just updated

Shelby: They’ll focus on having enough jobs

Shelby: Without worrying about having too many

Sean: Why would they ever worry about too many jobs?

Shelby: A booming job market used to mean higher inflation

Shelby: But now, inflation stays low, even with a lot of jobs open

Sean: How will they know if they hit maximum employment?

Shelby: One way to think about that is

Shelby: When everyone who wants a job can get one

Shelby: The goal is to reach people everywhere

Sean: Why is that important?

Shelby: For a healthy economy, everyone needs the chance to work

Sean: Especially when things are stressed!

Shelby: Yeah, low and moderate income areas are often hit hardest

Shelby: So it’s important to make sure everyone benefits when the economy gets strong

Sean: So, why the change?

Shelby: They’ve talked to people all over the country since 2019

Shelby: So they’re acting on what they’ve learned

Sean: Interesting, thanks!

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The views expressed here do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.