The Odd Revelation from The Fed's June Statement

Its justification for ending stimulus is puzzling

As widely expected, the Federal Open Market Committee meeting today declared that no additional stimulus will be provided to help reboot the struggling economic recovery -- but there was one surprise. Attempting to justify its decision not to pump more monetary stimulus into the markets, the Fed statement says something awkward, at best, and absurd, at worst. Just where does the Fed consider full employment to be?

Here's the key excerpt in an otherwise unremarkable statement:

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate.

This is a strange thing for the Fed to say. The pace of the recovery will pick up in coming quarters -- okay maybe, but the point is that currently unemployment is no where near consistent with its dual mandate. The unemployment rate is 9.1%, and underemployment is much more severe. Even if hiring does reach levels consistent with what we saw in February through April, full employment will not be restored for a very, very long time. Fed chieftains can't honestly believe that this rate of job growth is consistent with its dual mandate.

The Fed could do a better job at justifying its inaction than this. The fact is that just about no one expects hiring over even the next year or two to be aggressive enough to be consistent with the Fed's dual mandate, as it could be five or more years before maximum employment is attained. Is the Fed's supposed rationale here really fooling anyone?

Instead, the FOMC should have said two things. First, the central bankers probably don't believe additional monetary stimulus would do much to produce much additional hiring. Second, they're becoming concerned with the consequences of trying to do too much. The cost of more monetary expansion at this time could be higher inflation than the committee is comfortable with.

And that's a legitimate stance. The Fed would be saying, "We've done what we can do and our concern has shifted to inflation." That position may be controversial, but it's not crazy. What is crazy? The claim that "the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels ... consistent with its dual mandate."

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