The Fed’s Latest Tactic: ‘Overshooting’ the Economy

Evan Soltas comments on the Federal Reserve’s tacit acknowledgement of a new challenge: “how to change tack as the U.S. economy reaches full employment.”

Soltas notes that the Fed’s “new idea is for ‘overshooting': the idea that encouraging faster growth, even at the risk of higher inflation, will enable the U.S. economy to recover some of the productivity it lost in the recession.”

“The millions of unemployed haven’t disappeared, they argue. They’re just waiting for a chance to succeed in a better economy.”

“In fact, many of those who dropped out of the labor force during the recession are highly skilled … About 40% of the drop in labor-force participation was driven by adults age 25 to 54 who chose to stop searching for work. It seems likely that a strong economy could lure them back to the labor market.”

Federal Reserve Bank of St. Louis