The Federal Reserve continues to be the key agency for fighting joblessness, and in a speech today Vice Chair Janet Yellen delivered an important address in which she endorsed the most realistic plan for delivering monetary stimulus.
The idea, originating with Chicago Federal Reserve President Charles Evans, is to tie future changes in interest rates to specific inflation and employment targets including an explicit commitment to allow the inflation rate to temporarily rise above 2 percent. Yellen says that "several" members of the FOMC back this kind of approach and she is "strongly supportive" of it. She also makes the key point that "if 2 percent inflation is the Committee's goal, 2 percent cannot be viewed as a ceiling for inflation because that would result in deviations that are more frequently below 2 percent than above and thus not properly balanced with the goal of maximum employment." Again, she's saying the Fed needs to be a bit more tolerant of inflation on the upside.
This is potentially a huge deal. Yellen is an important policymaker in her own right, and the Federal Reserve Board of Governors usually acts as a team so it's unlikely she'd be out there with this speech unless Ben Bernanke wanted to shift the Overton Window a bit.
As I've said before, we're getting a new FOMC for Christmas this year with Evans and Boston's Eric Rosengren joining the Committee and now it looks like the permanent board is also eyeing stimulus. That's excellent news for the American labor market.
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