POLLIN: Well, there was a very important report statement from the Fed chairman, Ben Bernanke, last week, in which he said that the Fed is going to continue its essentially zero interest rate policies until—and he set specific targets—until unemployment falls below 6.5 percent or inflation rises above 2.5 percent.
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Now, there’s a lot of extraordinary features to this statement. Number one, the fact that he’s setting a target at all is significant, and the fact that he set an employment target, because for a generation now, central bank policy has been centered around the idea that their job is to set an inflation target, and unemployment can go wherever it needs to go, but unemployment must be kept under control, so the fact that inflation must be kept under control. So the fact that Bernanke even announced an official employment target is significant, and it is a step away from the neoliberal framework of conducting monetary policy that prevailed prior to the recession.
Now, what about the target itself? Well, Bernanke also acknowledges, he says, getting us to 6.5 percent unemployment is almost certainly not going to happen until the end of 2015, if that. Their own target for the coming year, the Fed’s own target for the coming year for unemployment, is between 7.3 and 7.7 percent, official unemployment. Today the unemployment rate is officially 7.7 percent. So the Fed itself is suggesting they don’t really think that we are going to get any significant gains in unemployment over the full 12 months, even with a interest rate that they’re setting at zero percent.
Now, what does this all mean? Bernanke is essentially acknowledging that he doesn’t have the tools. As he himself said in his statement, if I had a magic wand and could reduce unemployment to 5 percent, I would, I’d wave the wand. He’s saying he doesn’t have the tools.
Now, why doesn’t he have the tools? The Fed, as we’ve discussed in earlier shows, the Fed has set the interest rate that they target, the federal funds rate, at zero, at zero. Banks get money for free. They can get as much as they want for free. And that’s supposed to go out into the economy, stimulate businesses to expand and hire workers.
via The Fed Targets Unemployment With More Money for Banks. Full transcript available there