Namely, if the policy prescriptions for achieving the inflation and unemployment goals are in conflict, we will take a balanced approach promoting the return to each, taking into account the size of the deviations and the relative  3  2  See FOMC (2005). BIS central bankers’ speeches  speeds at which convergence can be expected. As we all know in this audience, there is an enormous literature related to characterizing the monetary policy loss function for a central bank with a dual mandate – such as work by John Taylor, Lars Svensson and Michael Woodford.4 For me, our Federal Reserve dual mandate responsibilities are well captured by a quadratic loss function that equally weights squared deviations of inflation and unemployment from their period goal values. In the U.S. today, that would be 2 percent for inflation and 5-1/4 to 6 percent for unemployment given today’s structural challenges in the labor market.5 Just about every major central bank around the world publishes something akin to such a framework statement. In one way, the Federal Reserve is different because, unlike other countries, we have a dual mandate, and so our framework explicitly addresses goals for both inflation and the real side of the economy. But just about every bank with a single price stability mandate also says that it will avoid undue disruptions to the real side of the economy when pursing its inflation goal. Indeed, some are quite clear about following a flexible inflation targeting strategy. Policy projections What about the policy projections?
There are two important ingredients: Our explicit inflation objective is 2 percent, and this is to be achieved over the long run. As recently as 2005, many FOMC participants preferred to describe a range of inflation outcomes as being consistent with our inflation mandate instead of stating it as a single number.3 Our current statement narrows our objective to 2 percent. It also sees this as an average that we aim to achieve over the long run, in recognition of the obvious realism that inflation may deviate from this goal from time to time owing to economic challenges, conflicts in achieving the dual mandate objectives and difficulties in the policy transmission channels. The statement also notes that maximum employment is largely determined by nonmonetary factors, which are difficult to measure and may change over time. Hence, we cannot and do not specify a fixed, time-invariant goal for it. But FOMC participants can provide their current assessments of goal variables related to the achievement of maximum employment. We do so using the central tendency of FOMC participants’ projections for the rate that unemployment would converge to in the absence of further shocks to the economy. As of January 2012, this rate is 5-1/4 to 6 percent. The statement also indicates that policy will seek to mitigate deviations in inflation and unemployment from these longer-run goals, and addresses the weighting of relevant costs and benefits when trying to close these gaps.