Question

So with the current low unemployment rate in the United States, what is the goal when it comes to interest rate that the Federal Reserve is deciding on ?

Answer 1

The mandate of the Federal Reserve in the US is to conduct monetary policy for the achievement of three goals

1. Maximum Sustainable Employment: It is the highest level of employment that the US economy can sustain while maintaining a stable inflation rate. This is because, as per the Phillips curve, inflation and unemployment rate are inversely related. A decrease in unemployment will result in higher inflation.
2. Stable Prices: In other words, ensuring that prices don’t fluctuate much, so that consumers and businesses don’t have to worry about increasing or decreasing prices.
3. Moderate Long-Term Interest Rate: Ensuring moderate long-term interest rate to ensure that inflation is contained but at the same time investment is also not adversely affected.

Now it is given that unemployment rate is currently low in the US. So, the focus of the Federal Reserve will be on maintaining moderate long-term interest rate.