The Federal Reserve’s Dual Mandate

On September 7, 2011, Charles Evans, President of the Federal Reserve Bank of Chicago delivered a speech at the European Economics and Finance Centre in London pinpointing a detailed argument of the U.S.’s need to accept higher levels of inflation. The speech hinges on the Fed’s dual mandate; a responsibility to balance price stability (inflation), and levels of employment. Evans sees the Fed’s inflation target of 2% as much too low considering the current 3 year economic contraction. As unemployment sits at over 9%, Evans sees the Fed’s response to high unemployment as uneven to the response of a hypothetical rate of inflation the same amount over it’s 2% target as the current unemployment rate over a natural rate of unemployment (6%). Indeed it seems as if the Fed is more fearful of high inflation than high unemployment. Setting a cap on inflation while unemployment wavers more than 3% about the natural rate doesn’t seem very conscionable. But in such a climate of uncertainty for the American worker a sense of trying would seem to help the level of confidence in restarting the economy.

“Suppose we faced a very different economic environment: Imagine that inflation was running at 5% against our inflation objective of 2%. Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn’t any doubt. They would be acting as if their hair was on fire. We should be similarly energized about improving conditions in the labor market.

In the United States, the Federal Reserve Act charges us with maintaining monetary and financial conditions that support maximum employment and price stability. This is referred to as the Fed’s dual mandate and it has the force of law behind it.”

http://www.chicagofed.org/webpages/publications/speeches/2011/09_07_dual_mandate.cfm

The months of the Fed waffling behind Bernanke’s constant suggestions that the Fed has an array of tools at its disposal it could use to combat the economic malaise but not actually implement them is curious. All may be forgotten if September 21st’s Operation Twist turns out to be a rousing success, but it should not hide the length of the Fed taking the path of least resistance. Warren Mosler thinks that perhaps any action on part of the Fed would tell force the forecast into thinking it had finally gotten so bad that the Fed needed to step in. Following the debt ceiling fiasco one would have thought the Fed would step in immediately to bolster the treading economy. Of course this round of quantitative easing is better late than never, and we will have to see how much of a positive effect it has.

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