58. On central bank goals

While the Bank of Canada has one goal - making sure that inflation is between 1% and 3% and trying to maintain it close to 2%, the FED's task is more complicated: they have to control inflation, unemployment and interest rates. This is like hitting three birds with one stone: possible when they line up just so, but not likely. In this article Mike Moffat argues that the FED should concentrate on inflation. He points out two reasons: 1. it is not clear what unemployment rate should the FED target
2. It is not clear what tradeoff between inflation and unemployment should be.

ad 1. The central bank should target the natural rate of unemployment (the article uses NAIRU, which is a similar concept). But the FED does not know what the natural rate is. If it targets a rate that is too low, inflation will rise over time; if it targets the rate that is too high, there will be deflation.
ad 2. Dr Moffat asks a straightforward question: if a recession raises the unemployment rate to 10%, how high inflation should the FED tolerate to bring the unemployment rate down? Is 7% acceptable? Is 20%? It is difficult to say.