Bloomberg (05/29/14) Aki Ito

During periods of high long-term joblessness, the U.S. Federal Reserve should attempt to reach full employment by letting inflation rise above the Fed’s target, says John Williams, Federal Reserve Bank of San Francisco president. “Faced with high long-term unemployment following the Great Recession, optimal monetary policy would allow inflation to overshoot its target more than in standard models,” Williams says in a paper co-written with Glenn Rudebusch, the Fed district bank’s research director.

Prices may respond to short-term unemployment more than they do to long-term unemployment, so inflation may rise even with large numbers of people out of work for long periods, the paper argues. Therefore, the Fed should make sure it broadly defines full employment and incorporate the long-term unemployed in the definition, the paper says.