The US Federal Reserve is trying slow the economy enough to increase unemployment by about 1.4 million people in order to reduce inflation. Specifically, the Fed wants to hit 2% inflation which would require the unemployment rate to stay around 3.5%. Currently, the unemployment rate is at 3.7% and the federal funds rate is at 2.4%. In order to achieve this rate of unemployment, the Fed will have to bring economic growth down through its new policies being implemented. Specifically, in order to slow growth down, the Fed is planning to raise its interest rate target above its long run level of around 2.8%.
This topic connects to the lesson on "The State and Monetary Affairs" and how monetary policy effects unemployment and inflation. Specifically, the concept in the article reflects "Phillip's Curve" and the relationship between unemployment and inflation. The Fed making these policy decisions to keep inflation low is worth the risk because low levels of inflation is a sign of a healthy economy and will increase long term investments. The reason that the Fed wants to hit 2% inflation is because if inflation continues to rise through the success of the economy, it has the potential to devalue long term investments and makes it harder to consume. This idea of meeting the low inflation target will also affect wage bargaining because an unexpected increase in inflation will lower the real wage and reduce unemployment while an unexpected decrease in inflation will raise the real wage and increase unemployment. With this new policy in mind, it should be interesting to see how the President reacts because he has already expressed disapproval of the Fed. It will be interesting to see if the Fed leans towards the President's demands or if it stays true to its plans.