The Fed at 6 1/2 Percent Unemployment

The unemployment rate has fallen to 6.7 percent. January’s employment situation, to be released next Friday, may show an unemployment rate of 6 1/2 percent or lower—the Federal Reserve’s stated threshold for raising short-term interest rates. What does this mean for the Federal Reserve, and for the economy’s future? In a previous article for e21, Charles Calomiris and I discuss reasons why the Federal Reserve ought to be wary about setting specific, numerical objectives for unemployment in the same way it has already set a specific, two-percent target for long-run inflation. It is not that Federal Reserve policymakers should not care about unemployment—to the contrary, they should.