The Fed’s Dual Mandate
In her statement upon being nominated to be vice chair of the Federal Reserve Board of Governors, Janet Yellen mentioned the dual goals imposed by Congress on the Fed’s conduct of U.S. monetary policy. It is common to hear the Fed’s mandate described in terms of its “dual goals.” Here’s the actual statutory language:
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
I guess that language is just enough of a jumble that it doesn’t really matter that there are actually three goals: maximum employment, stable prices, and moderate long-term interest rates. Maybe the third gets lopped off because we think of the Fed’s control of interest rates more as a means than as an end. And because employment and inflation are the two recognized poles of monetary policy.
In more ways than one, though, it seems that the statutory language takes a back seat in directing Fed policy priorities. The word maximum in “maximum employment” is understood to be implicitly limited by the need to stave off inflation, though the need to escape high unemployment doesn’t seem to imply complementary limits to the pursuit of stable prices. Also, the statute’s more direct mandate has to do with long-run growth tied to increased production; the other two (or three) goals are almost afterthoughts.
I’m not especially knowledgeable about any of this, but I’d just note that this is a statutory provision which, however it was intended, seems tailor-made to supply obfuscatory justification of whatever direction Fed policy happens to take. There’s a little bit of everything in there, and the Fed Board and Federal Open Market Committee have immense discretion in their control of what is probably the government’s most consequential role in the economy. And that’s why these nominations matter so much.
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