Adriana D Kugler: Disinflation without a rise in unemployment? What is different this time around

Speech by Ms Adriana D Kugler, Member of the Board of Governors of the Federal Reserve System, at the 2024 Stanford Institute for Economic Policy Research Economic Summit, Stanford University, Stanford, California, 1 March 2024.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Central bank speech  | 
06 March 2024

Thank you, Mark, and thank you for the opportunity to be part of the discussions today. For more than 40 years, the Stanford Institute for Economic Policy Research has assisted economic policymakers by producing sharp analysis and fostering the kind of constructive dialogue reflected in today's agenda.

My topic today is the Federal Reserve's dual mandate of maximum employment and stable prices-and, specifically, the tradeoffs that sometimes arise when pursuing these two objectives. I say "sometimes" because there have been times and certain economic conditions in which such tradeoffs did not arise-or at least were not apparent. This distinction is an important one, especially when considering the Federal Open Market Committee (FOMC)'s recent progress in reducing high inflation while the labor market has remained strong. Better understanding the tradeoffs, or lack thereof, in pursuing the dual mandate will help researchers and policymakers draw lessons from these welcome recent developments.

History of the Inflation–Unemployment Tradeoff

In 1977, Congress legislated the Federal Reserve's "dual mandate," under which the FOMC is required to pursue both maximum employment and stable prices, with both objectives on an equal footing. At the outset, it is worth stressing that these goals are generally complementary, and I will return to this point shortly. But when they are not complementary, one way to think of the policy problem is in terms of tradeoffs: Maximum employment is the highest level of employment that will not cause inflation to escalate significantly above levels consistent with price stability.

Before going into those tradeoffs, I want to emphasize that achieving the Committee's employment goal on an ongoing basis rests on achieving price stability. Price stability enables long-lasting economic expansions, which strengthen the labor market and expand employment opportunities. This process particularly benefits families and communities that all too often have been left behind.

But it is appropriate to recognize also that tradeoffs between the goals of maximum employment and price stability can occur in the short term. Indeed, the potential shorter-term tradeoff between unemployment and inflation has long featured prominently among the economic considerations of policymakers. Government action to boost employment through fiscal or monetary stimulus has historically tended to increase aggregate spending and inflation, too. On the contrary, actions to reduce inflation by shifting to contractionary fiscal or monetary policy have tended to slow economic activity and raise unemployment, or at least slow the pace of job creation.