Great Graphic: The Fed's Mandates: How Close?

The deviation of the economy from the Federal Reserve's targets is actually more pronounced now than a few months ago.  This Great Graphic comes from Benn Steil's Geo-Graphics blog.

Composed with Dinah Walker,  the chart illustrates that the core PCE deflator is moving away from the Fed's 2% target faster than the unemployment rate is falling toward the mid-point of the Fed's long-term forecast (5.6%)

The in-laid chart shows the gap, assuming that both the inflation and employment mandates have equal weight.  Given the Fed's decision to taper, it suggests that officials are giving more weight to labor market developments.  That said, it did upgrade the tenor of its concern of the low inflation, without providing a quantitative threshold. 

At the same time, we note that although it is commonly talked about as two mandates, and even Fed officials often use that short-hand, in fact, the Fed has three mandates.  As it celebrates its 100-year anniversary, it behooves us to keep the third mandate in mind:  financial stability.

At Bernanke's press conference following the FOMC decision to taper, in response to a question the Chairman said, " I don't think you can completely ignore financial stability concerns in monetary policy."   Perhaps if the financial stability mandate was taken more seriously, the economic and financial conditions would be significantly different than what we currently face.

Great Graphic: The Fed's Mandates: How Close? Great Graphic:  The Fed's Mandates:  How Close?  Reviewed by Marc Chandler on December 20, 2013 Rating: 5
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