An overhaul of the Federal Reserve's monetary policy framework may be needed in order to achieve a "full employment future."
The CBPP report explored alternatives to the Fed's current practices. The goal was to examine the proposals' potential effectiveness in promoting full employment, particularly "the strong and sustained labor market conditions that boost living standards and career trajectories across the income distribution and contribute to broad prosperity," the paper reads.
Carola Binder, assistant professor of economics at Haverford College in Pennsylvania and Alex Rodrigue, a Haverford College math and economics major, co-authored the CBPP report. They wrote about their research in an op-ed for the Huffington Post.
"The Fed's monetary policy is not entirely to blame for the problems associated with labor market slack- weak demand, chronically low or negative inflation, slow growth, stagnating wages, and rising inequality - but it could be part of the solution," the op-ed reads. "That will require more than just fine-tuning, however; it will require a new framework for monetary policy. We aspire for a future characterized by full employment: consistently strong labor market conditions that enable workers across the income distribution to bargain for higher wages."
The Fed, the central bank of the United States, has a "dual mandate" to keep prices stable and maximize employment. The Fed's inflation target is 2 percent and it does not define a specific figure for maximum employment.
Economists today, however, generally consider full employment to be somewhere in the range of 4.75 percent and 5 percent unemployment. The national unemployment rate in August was 4.9 percent.
"The Fed does not explicitly define a number corresponding with maximum employment, but it is clear that both the United States and many European economies have fallen short of this goal in recent years, despite the job market's considerable progress," Binder and Rodrigue wrote in the op-ed.
The report authors argue that alternative policies including price-level targeting, nominal income targeting, and nominal wage targeting have the greatest potential effectiveness for promoting full employment.
It would be easiest to put price-level targeting into practice, particularly "for central banks that currently practice inflation targeting, because of the similarities between the two," according to the experts.
"Price-level targeting would improve on inflation targeting by mitigating the tendency for the inflation target to be treated more like a ceiling than a symmetric target," the report reads.
As for nominal income and wage targeting, the alternative strategies have the highest potential effectiveness for promoting full employment, though they would require bigger adjustments in the policy framework, the experts said.
From the op-ed:
Nominal income is a measure of aggregate economic activity. The central bank could set a target path for nominal income, and aim to keep it growing at, say, 5 percent per year.
Steady nominal income growth is a good indicator of stable employment conditions. This type of framework could promote more stable output and employment, while keeping inflation low on average, and may be easier for the public to understand than inflation targeting, boosting people's confidence and ability to plan for the future. Under nominal income targeting, the Fed would have acted earlier and more aggressively in the financial crisis. This likely would have resulted in a less severe downturn.
Federal Reserve policymakers, meanwhile, are "not actively considering" policy framework alternatives such as price-level or nominal targeting, Fed Chair Janet Yellen said last month. The ideas, however, "are important subjects for research," she said.
The symposium was entitled, "Designing Resilient Monetary Policy Frameworks for the Future."
"The two key words here are framework and future," reads Binder and Rodrigue's Huffington Post piece. "In an economy that's increasingly unequal in terms of wealth, wages, and power, the Fed's framework -- which encompasses its goals, tools, and strategies -- is of critical importance. As we argue in (the new CBPP paper), the Fed is past due for a new framework, one capable of dealing with today's most pressing economic challenges."