Is the FOMC achieving its goals? Narayana Kocherlakota weighs in

Part 8
Is the FOMC achieving its goals? Narayana Kocherlakota weighs in (Part 8 of 8)

Must-know: Why Kocherlakota says the FOMC needs to do better

The FOMC

Kocherlakota summarized his views on the conditions of the labor market and stated that the good news is that the labor market has improved since the end of the Great Recession. However, he also stated that the rate of improvement over the past four-plus years has been painfully slow. As a consequence, there’s still significant under-utilization of our country’s most important resource—its people.

Monthly Employment- Non-Farm PayrollsEnlarge Graph

Kocherlakota concluded that the FOMC is underperforming with respect to its goal of promoting maximum employment.

While summarizing his report on the FOMC’s performance with respect to its two congressionally mandated objectives to his audience at the Rochester Chamber of Commerce, Kocherlakota highlighted his two main conclusions.

  1. The FOMC is undershooting its price stability objective.
  2. The FOMC is also underperforming with respect to its maximum employment objective.

The FOMC has been undershooting its price stability objective, as inflation has been running well below the goal of 2% and is expected to remain that low for several years. The undershooting suggests that the American economy is wasting available resources, especially its human resources. This is enough evidence of underutilization in the performance of key labor market metrics. So the FOMC is also underperforming with respect to its maximum employment objective.

As part of its monetary policy measures to attain its dual objectives, the FOMC recently declared that it may not increase the Fed funds rates in the near future—not until economic conditions warrant the change. Changes in the Fed funds rate may affect certain Treasury ETFs like the iShares Barclays 1–3 Year Treasury Bond Fund (SHY) and the iShares Barclays 20 Year Treasury Bond Fund (TLT), which track the performance of short-term and long-term U.S. Treasury securities, respectively. ETFs like the SPDR S&P 500 ETF (SPY) and the iShares S&P 100 ETF (OEF), which track broader market indices and hold the large-cap equities of companies like Apple Inc. (AAPL) and Exxon Mobil Corp. (XOM) in their portfolio, are useful in indicating the course that the U.S. economy is taking.

Kocherlakota concluded by saying that he believes the FOMC needs to do better—and he looks forward to working with his colleagues to make that happen.

To learn more about how monetary policy affects your investments, see the Market Realist series Richard Fisher on monetary policy: Where to from here?

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