[lbo-talk] Vice Chairman Stanley Fischer's remarks at Jackson Hole

Eugene Coyle e.coyle at me.com
Sun Aug 30 09:54:14 PDT 2015

The first (substantive) paragraph in the Fed's Vice Chairman's remarks is this:

> Although the economy has continued to recover and the labor market is approaching our maximum employment objective, inflation has been persistently below 2 percent. That has been especially true recently, as the drop in oil prices over the past year, on the order of about 60 percent, has led directly to lower inflation as it feeds through to lower prices of gasoline and other energy items. As a result, 12-month changes in the overall personal consumption expenditure (PCE) price index have recently been only a little above zero (chart 1).
full remarks at http://www.federalreserve.gov/newsevents/speech/fischer20150829a.htm

Whatever about Fischer's views, and there is much to say about those, I will comment only on the first sentence. Interesting -- no, shocking -- that the Fed here confesses to a "maximum employment objective." The idea that 5.2% unemployment is full employment has been expressed frequently by Fed officials, including regional bank Presidents, e.g. the president of the San Francisco Fed. To call 5.2% "full employment" is, I will say, ridiculous, but to confess that it is "our maximum employment objective" is to reveal powerful policy officials detached from the economy.

5.2% of a total labor force that has been sharply reduced by people no longer participating is not 5.2% of what the labor force was eight years ago. Those non=participating still exist, but not in Stanley Fischer's analysis here.

In the 1960s the national policy consensus was that 3%, not 5.2%, was full employment. Whether 3% was actually some real number or whether a lower number,, perhaps 2% was full employment depends on which side you are on. In the Kennedy administration the realists announced that driving unemployment down to 4% was an achievable goal. So how did 5.2% (note the precise decimal!) get to be agreed upon?

When did the Fed switch from "full employment" to "our maximum employment objective"? I missed that announcement.


PS If Fischer rather than Janet Yellen has the votes, we can take this speech as an announcement of a September increase in the targeted interest rate.

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