Authored by Alexander Salter via TheDailyEconomy.org,
Exploring the Federal Reserve’s Three-Fold Mandate
When asked about the Federal Reserve’s job, most people would mention maintaining full employment and stable prices, referring to the commonly known “dual mandate.” However, there is a lesser-known third aspect to the Fed’s mandate that often goes unnoticed.
The Federal Reserve Reform Act of 1977 expanded the Fed’s objectives to not only include job promotion and price stability but also the maintenance of “moderate long-term interest rates.” Despite this, the interest rate component of the mandate is often considered redundant, as achieving employment and price stability goals indirectly affects interest rates.
From an economic perspective, the argument for the redundancy of the interest rate plank is strong. Interest rates are determined by market forces based on the supply and demand for loanable funds, and the Fed’s primary focus on price stability already influences interest rates. However, the legal requirement for the Fed to consider interest rates remains, highlighting a discrepancy between economic theory and legal obligations.
Moreover, the reasoning behind deeming interest rates irrelevant could also be extended to employment. Just as markets efficiently determine interest rates, they also find the right balance between labor supply and demand. If the interest rate plank is deemed redundant, then logically, the employment plank should be as well.
In order to address this discrepancy and improve Fed policymaking while upholding democratic norms, an amendment to the Federal Reserve Act is proposed. The amendment would narrow the Fed’s goal to focus solely on price stability, aligning with economic theory and legal requirements.
Advocating for Price Stability
The proposal to prioritize price stability aligns with current economic challenges, such as rising inflation rates and public concerns about high prices. By refocusing the Fed’s mandate on price stability, policymakers can address economic issues more effectively and prevent overreactions to external factors like the COVID-19 pandemic.
Striking a Balance Between Law and Policy
Resolving the tension between central banking as a matter of law and policy requires both statutory changes and a consistent application of economic principles. By making the Fed responsible for stable prices alone, policymakers can streamline the Fed’s objectives and improve its effectiveness in achieving economic stability.
Disclaimer: The views expressed in this article are solely those of the author and do not necessarily reflect the views of ZeroHedge.
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