The new Chairperson of the Federal Reserve gave a speech in Chicago that does an excellent job of describing the Fed's mission and the policies that it uses to achieve its goals. She also provided her views on the state of the economy. I have highlighted the key points in her speech below.
The Fed has three missions:
* Price stability target is 2% inflation rate
* Employment stability target is unemployment rate with floor of 5.6%
* The Fed also has a mission to maintain the stability of the financial system
Fed Performance Against its goals:
* Fed took extraordinary actions that stabilized the financial system
* Inflation rate is below the 2% target rate
* Unemployment rate is above Fed target
How the Fed views the unemployment situation:
* 6.7% unemployment rate is too high; labor force participation rate is too low
* Poor fit between job skills and labor demand does not explain high unemployment.
* The Fed will use its tools to increase labor demand
The Fed tools kit:
* Low interest rates are the path to increased labor demand
* Fed will keep short term interest rates low
* Fed will continue to purchase long term securities to keep long term rates low
* Lower interest rates will stimulate consumer demand for interest sensitive consumer durables
* Lower interest rates will keep will help the housing market
* Lower interest rates will encourage business investment
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