The Dueling Mandate

Executive Summary

Throughout its history, the Federal Reserve’s monetary policymaking has been adversely affected by its twin and equal directives – to obtain maximum employment and stable prices.1 Notwithstanding the desire by Congress and the voters to obtain both objectives, the Federal Reserve only has the ability to foster long run price stability. Indeed, like all other central banks, the Federal Reserve has only limited ability to influence short run employment, and even less ability to affect long run employment. I propose that the Federal Reserve consider declaring victory and simply announce what it believes – that price stability is its first priority, as price stability is the necessary precursor for sustaining long term maximum employment. This interpretation of the dual mandate can be accomplished, I believe, without legislation. The Federal Reserve, alternatively, could request that the Federal Reserve Act be rewritten to reflect this operational understanding of the dual mandate. This approach, which is perhaps a better way to improve the public’s understanding of monetary policy, is riskier given the Federal Reserve’s relationship and losing record with Congress.

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