MONETARY POLICY FEDERAL RESERVE Breaking Down the Federal Reserve's Dual Mandate

 

The U.S. Federal Reserve's mandate was shaped in the 1970s. This was a period that experienced simultaneous high inflation and unemployment, a condition known as stagflation. Modifying the original act that established the Federal Reserve in 1913, the Federal Reserve Act of 1977 clarified the roles of the Board of Governors and Federal Open Market Committee (FOMC).1

Congress explicitly stated the Fed's goals should be "maximum employment, stable prices, and moderate long-term interest rates." It is these goals that came to be known as the Fed's "dual mandate" and remain today.2 In this article, we explore all three facets of the central bank's mandate by first looking at maximum employment before turning to the other two goals, which can effectively be treated as a single mandate.

KEY TAKEAWAYS

• The Federal Reserve's two mandates were shaped in the 1970s.
• The first is to maintain maximum employment and the second is the keep prices stable while and long-term interest rates at moderate levels.2
• Rather than trying to reach 100% employment, maximum employment means keeping it at levels that are seen in normal economic conditions when there is neither a boom nor a recession.
• Stable prices and moderate long-term interest rates are deemed one mandate.
• Long-term interest rates are set with an eye to managing pricing pressure and inflation.