The Federal Reserve's "Dual Mandate"

Recently, there has been increasing mention of the Federal Reserve's "Dual Mandate."

While my thoughts on the topic are complex, and I am not necessarily in agreement with it, I think highlighting some reference material on the the "Dual Mandate" is apropos as I expect there to be much more mention of this in the future.

One of the most thorough discussions of the "Dual Mandate" - especially in the context of our current economic situation - can be found in a February 13, 2012 speech by FRBSF President and CEO John C. Williams titled "The Federal Reserve's Mandate and Best Practice Monetary Policy."

An excerpt from the speech:

Let me start with the Fed’s mission. It’s often said that Congress assigned the Federal Reserve a dual mandate: maximum employment and stable prices. But, that’s not quite accurate. In fact, the Fed has a triple mandate. Section 2A of the Federal Reserve Act calls on the Fed to maintain growth of money and credit consistent—and I quote—“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.”

The above paragraph contains a footnote referencing the following, as seen in the Federal Reserve Act, Section 2A (Monetary Policy Objectives):

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.

[12 USC 225a. As added by act of November 16, 1977 (91 Stat. 1387) and amended by acts of October 27, 1978 (92 Stat. 1897); Aug. 23, 1988 (102 Stat. 1375); and Dec. 27, 2000 (114 Stat. 3028).]

The speech also contains a variety of other notable material, including some long-term charts illustrating various pertinent metrics concerning the "Dual Mandate," as well as the first endnote, an excerpt of which is seen below:

It is interesting to note that the Federal Reserve’s legal mandate has evolved over time in response to economic events and advances in understanding of how monetary policy and the economy function. For example, in the original Federal Reserve Act of 1913, the Fed had no mandate for macroeconomic stabilization and was only charged with providing an “elastic currency” and to act as a lender of last resort for banks. The quote here originates in the Federal Reserve Reform Act of 1977 and remains in place today. See Judd and Rudebusch (1999) for some discussion and more details.

The Federal Reserve Bank of Chicago also maintains a page on the "Dual Mandate" with charts updated as of May 9, 2012.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1320.06 as this post is written

Thomas Hoenig Story

The September 27-October 3 2010 issue of Bloomberg BusinessWeek has an interesting story titled "Thomas Hoenig is Fed Up."

The story chronicles various views of Thomas Hoenig and how these views differ from those of others prominent within The Federal Reserve.

I found one line, referring to Hoenig's views, particularly noteworthy given current (and likely future) Federal Reserve policies and reactions to them:

"The hard truth, in his view, is that there just isn't much more the Fed can do to help, and we all ought to admit that."
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SPX at 1165.15 as this post is written

Allan Meltzer Comment On "What Should the Federal Reserve Do Next?"

On September 9 The Wall Street Journal had various people respond to the question of "What Should the Federal Reserve Do Next?"

Among the various responses, I found this excerpt from Allan Meltzer's response to be most interesting:
"In "A History of the Federal Reserve," I concluded that the principal mistakes the Fed has made have resulted from giving excessive attention to current events and forecasts of highly uncertain near-term developments. By focusing on the short-term, the Fed neglects the longer-term consequences of its actions. The transcripts of FOMC show that the members are paying little attention to medium- and longer-term consequences."

SPX at 1109.55 as this post is written

The Federal Reserve's Role

In his December 7 speech, Ben Bernanke made the following comments with regard to the role of The Federal Reserve. For now, I will post an excerpt I found notable, and may comment upon it at a later date:

"In all of these efforts, our objective has not been to support specific financial institutions or markets for their own sake. Rather, recognizing that a healthy economy requires well-functioning financial markets, we have moved always with the single aim of promoting economic recovery and economic opportunity. In that respect, our means and goals have been fully consistent with the traditional functions of a central bank and with the mandate given to the Federal Reserve by the Congress to promote price stability and maximum employment."




SPX at 1113.69 as this post is written