About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline
LOG IN
LOG IN

1 [1] (March 12, 2025)

handle is hein.crs/fdlrsvsm0001 and id is 1 raw text is: Congressional Research Service Inforrning the legislative debate since 1914 S March 12, 2025 The Federal Reserve's Mandate: Policy Options The Federal Reserve (Fed) is responsible for monetary policy, which it conducts mainly by setting short-term interest rates to alter economic activity. (For more information, see CRS In Focus IF11751, Introduction to U.S. Economy: Monetary Policy.) Monetary policy is guided by the Fed's statutory mandate from 1977 to promote maximum employment, stable prices, and moderate long-term interest rates. The employment and inflation goals are called the dual mandate. Since 2012, the Fed has explained how it interprets its mandate in its Statement on Longer-Run Goals. It defines stable prices as 2% annual inflation, measured by the personal consumption expenditures price index. (The dual mandate has not prevented the Fed from adopting an inflation target.) The Fed does not set a maximum employment target, because, in its view, maximum employment is not directly measurable and changes over time owing largely to nonmonetary factors that affect the structure and dynamics of the labor market. At a March 2025 hearing, some Members of Congress argued that the economy would perform better if the dual mandate were replaced with a single mandate of price stability. Other Members agreed with Fed Chair Jerome Powell that the public has been well served by the current dual mandate. The question of whether the Fed would have chosen different policies under a single mandate depends on an unanswerable counterfactual, but both theory and the experience of other economies suggest that there might be less difference than some expect. Implications for Monetary Policy The argument for a single price stability mandate is that inflation is within the Fed's control over the medium term (although the Fed cannot perfectly offset short-term inflation shocks), whereas the Fed cannot influence employment in the long run, for the reasons quoted above. Therefore, it is argued, the Fed should use its one tool to focus on the one goal within its control. However, even if monetary policy cannot permanently affect employment, its effects are long-lasting. For example, in the Fed's own economic model, tight monetary policy can keep employment below maximum employment for several years. Because both goals are directly affected by monetary policy and of paramount importance, supporters of the dual mandate believe that both are appropriate. One potential problem with a dual mandate is that the Fed has one tool (short-term interest rates) to address two goals. In most circumstances, this is not a problem because the two goals are in sync-an economy in recession is typically characterized by unemployment that is too high and inflation that is too low, both of which the Fed can mitigate by lowering interest rates. Conversely, an overheating economy is typically characterized by inflation that is too high and unemployment that is unsustainably low, which the Fed can counteract by raising interest rates. In these scenarios, policy prescriptions are similar under either mandate type. Occasionally, the two parts of the mandate will be in conflict, however. For example, if inflation and unemployment are both high, should the Fed raise interest rates to address inflation or reduce interest rates to address unemployment? Whereas a single mandate would emphasize price stability, the Fed must choose which mandated goal to prioritize. The answer is likely to depend on context. For example, if inflation is very high and unemployment is only modestly above average, then the Fed can focus on inflation. If high inflation is expected to be transitory, then the Fed can focus on employment. When high inflation has been persistent, the Fed has tightened policy, even at the risk of high unemployment. Theoretically, a central bank with a single mandate will still take employment into consideration if it is predictive of future inflation. For example, if labor market conditions are a leading indicator of inflation, then ignoring them would lead to subpar inflationary outcomes. This is another reason why policy may be similar under either mandate type. Likewise, the Fed would not pursue policies that favor employment over price stability under a dual mandate if it accepts the mainstream economics premise that there is no long-term trade-off between unemployment and inflation. Performance Under the Dual Mandate Has the economy been well served by the dual mandate? Arguably, this is mainly an empirical question. However, the economy faces frequent unexpected shocks that alter short-term inflation and employment in ways that cannot be predicted. Thus, inflation is rarely exactly on target, and employment is rarely exactly at its maximum. Moreover, monetary policy affects the economy with lags, so the Fed needs to accurately anticipate how its policy will affect the economy in the future, but only some developments can be anticipated. For example, the Fed could not have predicted COVID-19 and put policies in place beforehand to offset its effects on employment and inflation. The Fed's performance can be assessed on the basis of whether monetary policy has been able to quickly correct deviations from the inflation target or maximum employment. Figure 1 shows that the dual mandate was not an obstacle to price stability-inflation was consistently low from 2012, when the Fed introduced its 2% inflation target, until April 2021, when inflation surged after the COVID-19 pandemic. Core inflation-which omits food and energy prices-was consistently near 2% from September 1992 to April 2021. The Fed did not achieve ,ittps://crsreports~congress.gov

What Is HeinOnline?

HeinOnline is a subscription-based resource containing thousands of academic and legal journals from inception; complete coverage of government documents such as U.S. Statutes at Large, U.S. Code, Federal Register, Code of Federal Regulations, U.S. Reports, and much more. Documents are image-based, fully searchable PDFs with the authority of print combined with the accessibility of a user-friendly and powerful database. For more information, request a quote or trial for your organization below.



Short-term subscription options include 24 hours, 48 hours, or 1 week to HeinOnline.

Purchase Access

Contact us for annual subscription options:

Contact Us

Already a HeinOnline Subscriber?

Log In

profiles profiles most