The Dangerous Redundancy

“The Fed’s modern statutory mandate, as described in the 1977 amendment to the Federal Reserve Act, is to promote maximum employment and stable prices.” These two requirements are commonly known as the dual mandate. These two requirements have arisen from the unique power that the US Fed has in comparison to most other central banks. Since New Zealand’s acceptance of it in 1990, many countries have adopted the single mandate method, where the main goal monetary policy is directed towards is monetary stability. This goal is most often pursued through inflation targeting. This choice makes interest rate decisions simple. While there are many difficult market conditions to wade through, inflation targeting creates a much simpler causal link between policy and desired outcome, along with an easy way to judge the policy of the past few periods. If a nation fails to hit their target inflation rate, the public and the rest of their government can hold the central bank accountable. While the Dollar’s role as an international anchor of value and common currency has declined in the past few years, it has still allowed the Fed the luxury of pursuing two goals at one time.

The dual mandate seeks price stability along with maximum employment. The Fed operates under the assumption that price stability will not be harmed by short term actions taken to promote low unemployment. While measuring and developing a concept of the real level of unemployment is difficult, it is easy to see its positive effects for national moral and economic growth. High Unemployment is one of the most consistent warning signs for national unrest and economic stagnation. High unemployment breaks families and increases crime, thus making it of utmost importance to any political leader that seeks to stay in office. While the Fed is theoretically separate from these pressures, the idea that they are in some way responsible for the state of the economy fuels their embrace of the dual mandate. If the Fed possesses the power and analytical capability to promote both goals, why should they actively hold back from helping Americans?

While the dual mandate is motivated out of a desire to help citizens, it has caused both directional confusion and practical problems. The issues with the second part of the dual mandate can be seen easily in the Covid-19 inflationary fiasco. Money intended to increase economic output powerfully damaged the primary mandate of the Fed while having a minimized effect on employment. Inflation skyrocketed to 7% in 2021, a direct result of the high spending in 2020. The cost of unemployment is high, but the cost of inflation is unbelievably higher. Every Americans’ money became noticeably lighter in their pockets, and the unemployment caused by Covid naturally decreased as Covid rates and regulations decreased. The limiting factor on employment had little to do with any factor controlled by the Fed. Unemployment was caused by a massive restructuring of society due to regulation and sickness. The dual mandate was responsible for the rapid lowering of the federal funds rate and numerous lending programs which contributed to the inflation that characterized the first few years of the 2020’s. While the Fed has cut down on inflation recently, we must ask whether the inflation caused during Covid was really necessary.

While some lives were certainly made easier by the Fed’s employment-driven actions during Covid-19, a focus solely on inflation targeting could have created a situation that did not take years of pain to resolve. The Fed does not need to treat employment as a primary goal, because if it does the job of enforcing monetary stability well, high employment will naturally occur. Businesses are most incentivized to invest and lend when they feel confident that the price level will remain predictable. The type of freedom needed to seek short-term employment goals necessarily makes the Fed less predictable, and increases the variability of the inflation rate. While some bumps in employment can be smoothed over thanks to the dual mandate, inflation targeting alone allows much more sustainable job creation and economic progress. Business resources do not have to be wasted reacting to changes in Fed policy if the Fed simply does less. Short of directly restructuring businesses, the best thing the Fed can do for job creation is simply maintain a steady price level. While the dual mandate promotes two excellent goals, it does so backwards. The belief that the Fed has a central responsibility in promoting employment harms the primary means through which the Fed actually can guard against unemployment.