Why it Matters Whether the Fed Targets Inflation or Unemployment

Today, more than four full years since analysts at the National Bureau of Economic Research declared the last recession officially over, unemployment, at 7.3 percent, remains elevated. The jobless rate still exceeds the 2001 recession peak and stands not far below the higher peak from the 1990-91 downturn. Incomes, whether measured in the aggregate by Gross Domestic Product or on the individual level for those who are employed, have fallen far below levels that were reasonably expected prior to the financial crisis. In the meantime, with its federal funds target still up against its zero lower bound, the Federal Reserve seems incapable of providing much further monetary stimulus through additional interest rate changes.

How should Federal Reserve policymakers respond to this continuing crisis? And what new procedures might they put in place to ensure that nothing like it ever happens again?