Aaron Steelman of Richmond Fed writes this superb history of Fed’s dual mandate.
It is very interesting to note how this mandate has shifted between inflation to employment from time to time.
Fed got its mandate in 1975 but discussions on Fed’s mandate started around 1945 post Great Depression. At that time it was more on employment and econs felt it did not have anything on inflation:
At the conclusion of World War II, with millions of American soldiers returning home, a large share of the workforce concerned about finding jobs as the economy transitioned from the production of wartime goods, and the specter of the Great Depression fresh in the minds of nearly all, Congress passed the Employment Act of 1946
Conspicuous in the final bill is the removal of the claim that citizens have a “right” to a job; so, too, is the acknowledgment of the importance of maintaining purchasing power—that is, the need to keep inflation in check. While most of the people who testified about the original bill were largely supportive of its goals, there were dissenting voices who thought it dangerously neglected the issue of price stability. Among them was Harvard University economist Gottfried Haberler.
Then for next 25 years till 1974 there was no real concern as economy did well. Inflation was low and so was unmployment. Then came Stagfaltion phase when inflation zoomed and output declined. This led to amendment of Fed act (via the famously known Humphrey-Hawkins Act):
The Humphrey-Hawkins Act contained numerous objectives, some of them relatively vague and perhaps contradictory, but with respect to unemployment and inflation, the objectives were clear. Within five years, unemployment should not exceed 4 percent for people 16 years or older, and inflation should be reduced to 3 percent or less, provided that its reduction would not interfere with the employment goal. And by 1988, the inflation rate should be zero, again provided that pursuing this goal would not interfere with the employment goal.10 Of course, the legislation was not binding in any real sense. Congress could not simply mandate such unemployment and inflation rates; it could set them only as targets. Still, Congress demonstrated, and made more explicit, the idea that the Federal Reserve should work to achieve both employment and inflation goals.
As this act was aadopted, Fed was criticised for ignoring employment as under Volcker focus was only on inflation.
Amidst debates and criticism of Volcker, the price stability mandate won. Fed members esp Bernanke wanted to give Fed an inflation target and discard the unemployment mandate. This weas opposed within Fed and not implemented. The came the 2007 crisis and Fed suddenly started mentioning unemployment in its statements:
While the idea that the Federal Reserve should pursue a “dual objective”—“dual mandate,” as Blinder and many in the media soon began to call it—had been around for decades, the term itself did not emerge in common parlance until 1995. Since then, its usage has become widespread among policymakers and journalists. However, it was not until recently that the FOMC addressed employment explicitly in its policy statement. Instead, the FOMC preferred to mention sustainable economic growth and price stability. As Daniel L. Thornton of the Federal Reserve Bank of St. Louis has written
until the September 21, 2010, meeting, there was no reference to the objective of maximum employment elsewhere in the policy directive or in the FOMC’s statement. The September statement read, “Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability” [italics added]. Reference to the objective of maximum employment was more prominent in both the November 2–3, 2010, policy directive and the FOMC’s policy statement. Both included the statement, “Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price st ability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate
Thornton paper covered in this blog as well
This is an interesting area of research:
This remains a topic of much discussion and debate among economists and policymakers. In that regard, the “dual mandate” is far from a historical matter, though why the Fed was given that charge and how it has responded to it in the past perhaps will shed light on proposals to address current macroeconomic problems..
Nice bit..
In that way even RBI’s objective is pretty ambiguously worded. It says:
“…to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.”
Based on this RBI is:
- Issuer of bank notes
- Manager of Monetary stability = price stability
- Look at the Currency value =m exchange rate stabiliser
- Credit system – Look at the system of credit
Apart from this, RBI is doing other tasks like government’s debt manager, financial stability manager etc. How the objective has shifted overtime and what made RBI take up the objectives is an interesting area of research as well..
