Fed Mandate: Maximum Employment & Stable Prices – So How Are They Doing?

The US Federal Reserve – the world’s most influential central bank – has a dual mandate: To ensure maximum employment and maintain stable prices. So let’s look at how the Fed is doing.

Maximum Employment

According to the Bureau of Labor Statistics (BLS), the unemployment rate in the US is currently 9.1%. That however is just the official figure (known as the U2 unemployment rate) which only counts those without jobs that have actively looked for work within the past four weeks.

The BLS actually calculates 6 different measures of unemployment, U1 through U6, that measure different aspects of unemployment. The broader U6 figure, which includes those who are only able to find part-time work and those who haven’t looked for work in the past four weeks, is currently 16.1%

Unofficial figures however suggest that the rate of unemployment is actually much higher. According to the website Shadow Government Statistics (see: shadowstats.com) the true unemployment rate (if you include long-term discouraged workers, who were “defined out of official existence in 1994”) is actually more than 22%.

Chart courtesy of shadowstats.com

Stable Prices

Since the Fed opened its doors in January 1914 the US dollar has lost 96% of its value, a trend that seems unlikely to change given their latest pronouncement that they will keep interest rates at 0.25% until “at least” mid-2013. Meanwhile inflation continues to eat away at the purchasing power for the greenback giving the appearance of rising prices.

Officially inflation is only 3.6% but thanks once again to Shadow Stats who calculate inflation using the methodologies that were used in 1980 we know that the true rate of inflation is actually 11%.

Conclusion

I think it’s safe to conclude that the Fed is failing to meet its mandate. They do however seem to be doing a good job of interfering in the financial markets. For example, following the Fed’s announcement of QE2 on 27 August 2010, the DOW rose 28.9% till its peak on 2 May this year and if this recent selloff continues I expect more intervention from the Fed.

 

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