It has become commonplace in monetary policy discussions to say that the US Federal Reserve is “missing on both sides of its dual mandate”. This is often taken to imply that Fed policy is far from ideal. Such an inference does not necessarily follow; using levels of inflation and unemployment to assess current policy is imprecise.

It says little or nothing about the appropriateness of the Fed’s actions.

The Fed has a directive that calls for it to maintain stable prices as well as maximum employment, along with moderate long-term interest rates. Since unemployment is high by historical standards (8.1 per cent), observers argue the Fed must not be “maximising employment”. Inflation, as measured by the personal consumption expenditures deflator price index , has increased to about 1.3 per cent in the year to July. The Fed’s target is 2 per cent, so critics can say the Fed has not met this part of the mandate. When unemployment is above the natural rate, they say, inflation should be above the inflation target, not below.