What Are the Goals of U.S. Monetary Policy?
Monetary policy has two basic goals: to promote “maximum” output and employment and to promote “stable” prices. These goals are prescribed in a 1977 amendment to the Federal Reserve Act. What does “maximum” output and employment mean? In the long run, the level of output and employment in the economy depends on factors other than monetary policy. These include technology and people’s preferences for saving, risk, and work effort. So, “maximum” employment and output means the levels consistent with these factors in the long run. But the economy goes through business cycles in which output and employment are above or below their long-run levels. Even though monetary policy can’t affect either output or employment in the long run, it can affect them in the short run. For example, when demand contracts and there’s a recession, the Fed can stimulate the economy–temporarily–and help push it back toward its long-run level of output by lowering interest rates. Therefore, in the short run, th
