The Fed’s Mandate: Single or Dual?

The question of the Fed’s mandate is back on the table. Chairman Bernanke has been asked to address the question in his upcoming monetary policy report to the Congress. More specifically, in what can only be called a strange quirk of timing, the question is whether the country would be better off if the Fed had a single mandate of fighting inflation as does the European Central Bank and the Bank of England.

I recall Mr. Bernanke’s arrival on the Board of Governors and member of the FOMC as “Governor” Bernanke in 2002. He was known to have an agenda of inflation targeting, but he was patient in pursuing his goal and Chairman Greenspan was cool to the idea so it didn’t happen.

For a brief history of the Fed’s mandate over the years, see my “Brief Analysis” article for the National Center for Policy Analysis.

While a single inflation mandate may not be a bad idea, this is hardly the time to formally withdraw from the battle against high unemployment. Both the ECB and the Bank of England have had essentially to ignore their single mandates during the past crisis, recession, and slow recovery.

The morning papers say that Mr. Trichet, President of the ECB, is poised to raise the policy rate later this week for the second time in the present cycle, but the European economy has slowed since his first tightening move, making the timing more awkward. I’m afraid the U.S. employment report later this week will once again highlight an economy hardly in a position to take a similar tightening move.

During my tenure on the FOMC—February 1991 to November 2004—the mandate question went from concern over apparently incompatible goals to a reconcilement based on the idea that in the long run the best environment for growth is a stable price level. I expect that’s where the balance will remain without formal changes necessary.

Comments (4)

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  1. The US Federal Reserve Board is essentially ignoring the employment mandate already, while working tirelessly to hold inflation at near zero levels — said another way, the Federal Reserve Board is filled with bankers who could care less about employment, and care a great deal about holding inflation as close to zero as possible — what is ironic is that the nation’s fiscal policy-makers in America (the peoples’ representatives in Congress) have essentially ignored their responsibilities to address unemployment (a responsibility implicitely imposed upon our elected officials by voters) — the sooner monetary policy (i.e., inflation, growth, and employment, in that order) becomes the exclusive domain of the Federal Reserve, and fiscal policy (i.e., employment, growth, and inflation, in reverse order to monetary policy) becomes the domain of Congress, the better for America, capitalism, and the world — restoring the division of labor between monetary policy-making (the Federal Reserve) and fiscal policy-making (the Congress) is an urgent priority for America at this point — at this point, no one in government has their eye on fiscal policy, which has always been the peoples’ domain in America…

  2. With all due respect, William, where do you get the idea that the Fed is trying to hold inflation at zero? Members of the FOMC and certain bank presidents are on record saying they feel inflation is actually lower than they’d like it to be (remember: when you owe someone a lot of money, higher inflation is actually better for you, the debtor, as you get to use the asset now but pay for it in devalued dollars).

    The Fed is trying to hold inflation back (fingers and toes crossed under the big mahogany table at 20th and Constitution, surely), not keep it at nothing. That does them no good – the only way the United States can pay off its debt to the Fed is if they make more money, loan us that money at interest, and then make more so we can pay off that money and that interest.

    I don’t believe the Fed is ignoring the employment mandate, I believe there is nothing they can do to change it. The jobs we’ve lost in the last three years are never coming back, not for all the cheap easy money in the world. Bernanke’s no magician.

  3. Benjamin Cole says:

    The Hong Kong Monetary Authority recently issued a study in which is determined that mainland China’s central bank favored growth over fighting inflation, when targets were at odds.

    Meanwhile the Bank of Japan has favored–it’s so-called implied policy–is zero inflation

    Look that the record for the last 20 years. China has boomed, and Japan has gloomed.

    Really, it ain’t even close. I’ll take some inflation with my growth, thank you. It frees up sticky wages, it give Dutch courage to lenders and borrowers (and we need optimism). A long slug of moderate inflation will help America deleverage.
    Yes, we need to balance the federal budget–that is not the same as having a stimulative monetary policy.

    Bernanke should maintain a QE program until we see some growth, and then inflation, as Friedman predicted. We cannot let some little anal money gnomes, obsessed with minute inflation rates to the point of fetish, to put a monetary noose around our economy.

    The worst threat now is that we do a Japan.

  4. Today’s Fed Statement implies a “Charmin Economy”. It is SQUEEZABLY SOFT!