For example, if energy costs spike, the basic forces of supply and demand dictate that firms will cut back on production and demand less labor, creating higher unemployment. It is inefficient for any policy – including monetary policy – to attempt to interfere with this natural adjustment process. It follows that the Federal Reserve’s operational definition of “maximum employment” has to vary over time.
But American businesses compete in a global marketplace, and as the financial crisis showed, when regulatory standards fall in other countries, Americans can pay the price.