Along with its original task of maintaining the safety, integrity and security of the U.S. banking system, in the post WWII period, the Federal Reserve (Fed) has also been charged with encouraging full employment and maintaining price stability. The Fed currently interprets its employment mandate with the economic measure of an unemployment rate of less than 6.5%.
For its price stability mandate, the Fed focuses on the personal consumption expenditure price index less food and energy. Given the Fed’s worries that the economy not slip into a deflationary situation, the current objective is to see the economy’s inflation rate rise above the long-term target of 2% and be above 2.5% to provide clear evidence that deflationary pressures have been averted.
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