Question

What are the two primary goals of Federal Reserve Monetary Policy and why is it impossible to pursue both goals at the same time?

Answer 1

The two primary goals of the Federal Reserve Monetary Policy are stable prices and maximum sustainable employment. The target inflation is set at 2% by the Fed. Now both these goals can not be pursued together as in the short run this is a negative relation between the unemployment rate and inflation (the Phillips curve). Thus if the Fed wants to lower inflation, it essentially means slowing down the economy and increasing the unemployment rate. For instance a contractionary monetary policy of increasing rates, will reduce inflation and increase unemployment. Thus, the Fed has to be careful with how it pursues it policy based on the given economic circumstances and whether growth or inflation deserves more weight.