Thursday, June 20, 2019

Paul Volcker on the Fed's dual mandate

From his book, Keeping At It:
In 1977 the Federal Reserve Act was amended to require that the central bank "maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote the goals of maximum employment, stable prices, and moderate long-term interest rates." Reasonable enough as an aspiration, but here we have the origin of what has since been interpreted as the "dual mandate." 
The following year, Congress passed the Full Employment and Balance Growth Act, known more widely as the "Humphrey-Hawkins Act" for the senator and congressman who sponsored the legislation. The new law had more than a bit of a monetarist flavor. It required the Federal Reserve chairman to report to the Congress twice a year on plans for monetary policy, setting out the board's targets for the growth in money and credit. That indeed was a specific mandate. It also went on to incorporate the previous less specific language about the "goals" of maximum employment, stable prices, and the now conveniently forgotten moderate long-term interest rates. A key issue for monetary policy is the degree to which that so-called dual mandate leads to clarity or confusion in the operating decisions of the Federal Reserve Board and Open Market Committee. I fear the latter.