The Fed’s Dual Mandate is Bull Sh*t

Pardon the title.  But I didn’t know of a much more succinct way to say it without emphasizing the point.  The thing is, I am tired of hearing about the Fed’s “dual mandate” of “price stability” and “full employment”.  President Obama was discussing this in a NYT interview this week.  But how often, during the history of the Fed, have we actually had “price stability” and “full employment”?  Let’s take a look.

If “full employment” is anything under 5% unemployment and “price stability” is core inflation below the Fed’s 2% target rate then the Fed has achieved its dual mandate a whopping 3.5% of the time since 1957 when core inflation was first tracked.  Yes, you read that right.  THREE POINT FIVE PERCENT OF THE TIME.*  That means the Fed has failed to simultaneously achieve both its mandates 96.5% of the time.  I wouldn’t call that failure.  I’d say they’re not even trying. And maybe they’re not?

Now, I’m fairly well versed in the structure of our monetary system.  And I think it’s helpful to understand precisely what the Federal Reserve is in order to put the dual mandate into context.  The Fed is really just a special bank with unique legal abilities given to it by Congress.  But it’s a bank that exists primarily to help the other banks operate more smoothly.  The Fed was created after the panic of 1906 precisely for this purpose – to oversee the private banking system and create some stability within the system.  It does so primarily by acting as lender of last resort and regulator of the banking system.

Perhaps most importantly though, the Fed serves as an overseer of the payments system. The interbank system or reserve system is crucial to a smooth operating payments system where private competitive banking is involved.  Before the Fed we basically had rogue banking.  If JP Morgan didn’t trust Bank of America’s ability to meet its obligations then the system froze up and a whole lot of people would get fired just because companies couldn’t access the money system all because two banks were worried about one another’s solvency.  The interbank market brought clearing into one place and helped reduce the risks in that system.  The Fed is the entity that makes sure it all works smoothly.

Today, the Fed does more than just regulate the banking system and oversee the payments system.  The Fed is actively involved in “monetary policy” and altering interest rates and influencing the banking system in various ways to try to achieve its dual mandate and hit economic targets.  BUT ALL OF THIS WORKS THROUGH THE BANKING SYSTEM!  So, before the Fed can ever even think of achieving some form of strategic monetary policy it MUST ensure the banking system is healthy.   Said differently, the Fed is really an entity that exists first to ensure healthy banks and second, to ensure that that there is price stability and full employment.  Of course, the Fed just about always succeeds in enriching the banks when problems occur.  But it rarely, if ever, succeeds in actually meeting its dual mandate of price stability and full employment.

I honestly don’t understand why we obsess over the Fed hitting its “dual mandate”.  It seems to me that the Fed is really just a bank servicing entity masquerading as something that can do much more than its history proves it’s capable of.  To those of us who understand the monetary system it’s obvious that the Fed really has one mandate – make sure the banks are healthy.  So maybe we should stop pretending the Fed is capable of achieving things it really can’t – like its dual mandate.

* The Fed’s “dual mandate” has evolved over time so it’s somewhat harsh to judge the Fed entirely by these figures.  


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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • LVG

    Nice one. Are you beginning to veer into the camp that says the Fed should do nothing except monitor the banking system?

  • Tradeking13

    Yeah, it’s high time they repealed Humphrey-Hawkins.

  • Frederick

    Isn’t monetary policy really just another form of trickle down economics that starts with enriching the banks and hopes that some of the money trickles down from Wall Street to everyone else?

  • Cullen Roche

    No. I don’t think the Fed should nothing but monitor banks. But I think we should be more realistic and stop relying on it to do virtually everything.

  • Anon

    Guys, just like Obamacare, the Fed’s dual mandate is actually the law of the land – so you cannot just wish it away as if it didn’t exist…

    What is unique today is that we finally have a U.S. president who, probably as the first one in U.S. history, pays more than lip service to the “improve employment” half of the dual mandate, which will make 200 million Americans struggling with poverty today a bit happier – instead of obsessing over inflation alone (which mostly makes rich people happier).

    I don’t think anyone can seriously suggest that the Fed cannot target employment: Nominal GDP targeting isn’t a particularly difficult concept to grasp. Reality is that the Fed was politically unwilling to target employment – so far.

    Once Obama picks a Fed chair and new FOMC members with employment in mind as well, the Fed will be more motivated than ever before in U.S. history to meet its satutory obligation to meet the employment mandate…

  • Anon

    To quote from the Federal Reserve Act (ch. 6, 38 Stat. 251, amended in 1977):

    “The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall 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 effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”

    It says nothing about having to reach 3.5% unemployment (btw. 5% is probably closer to full employment). This federal law mandates the promotion of maximum employment, which aspect – so far – was not used as a prominent nomination requirement by U.S. presidents.

  • Cullen Roche

    We’ve been obsessed with defeating high prices over generating full employment ever since NAIRU came to dominate the econ thinking. That is the idea that inflation will accelerate when a certain level of unemployment is hit. There’s flimsy evidence that it exists and the general concept is a big case of generalizing a concept across all economies.

    The Fed has become an entity that is supposed to hit its dual mandate, but worries first about banks, second about inflation and thirdly about FE. Full employment takes the back seat in most environments. We have Milton Friedman to thank for a lot of this thinking….

  • Martin T

    Hi Cullen,

    I agree, at least the ECB’s role is more simple, namely only price stability.

    The Fed’s mandate was extended to “maximum employment” in 1978 as a way of forcing the central bank to become a “political tool”. This extension of the mandate made sure the Fed would always be under continuous pressure from the politicians. But, Paul Volcker initially in the early 80s did not play it that way. He clearly understood the risk in not taming the inflation beast. He knew he could not fight on two fronts and initially targeted inflation versus maximum employment. His policy of taming inflation with a rapid surge in interest rates led to a very severe recession but put back the US economy on track. The recession was short but indeed very painful which led Mr Volcker to be hated by both Republican politicians as well as Democrat politicians calling for his head.

    One of the main reason of QE2, can be sourced to this ill-fated dual mandate.

    The Fed tried to increase jobs by lowering interest rates, weakening the dollar in the process, boosting exports but exporting inflation on a global scale (commodities price, well described by a BOJ research paper: , as well as lifting stock prices, playing on the wealth effect game.

    The saddest part of this “brilliant” ZIRP experience, is namely impoverished americans and record rising GINI.

    What our Fed central “magician” banker might find out in targeting the unemployment level (given the relationship between M2-velocity and the US labor participation rate over the years) is that the jobless rate can be a misleading gauge of labor market health. The employment-population ratio has remained near its lows of the recession, so much for that much hyped “recovery”. The employment-population ratio touched a record high of 64.7% in April 2000 before falling to as low as 58.2% in December 2009 and now we are at 58.7%…near the lowest level since 1983!

    With unemployment falling down due to a fall in the participation rate, now at 63.50%, there is nothing to cheer about the “real job creation” record of Mr Bernanke. That’s what I would call an epic fail.

    According to Bloomberg the percentage of Americans living below the poverty line was little changed in 2011 at 15 percent, or 46.2 million people. The poverty line is defined by the U.S. Census Bureau as those living on less than $11,702 per year, or $23,021 for a family of four. Food-stamp use climbed to a record 46.7 million people in June 2012 and to 47.8 million people in December 2012 from 28.2 million in 2008 (a 70% increase), according to the Department of Agriculture.

    Well done Ben…



  • Anon

    I agree mostly.

    The maximum employment mandate is there, it’s federal law and not following it could be prosecuted by the DOJ in theory. The Fed is still essentially a federally owned and controlled public agency, which transfers 95% of its profits back to the Treasury.

    The fact that it used to be weakly (if at all) enforced, due to capture of Fed polcies by the wealthy few, does not make the maximum employment mandate “bullish*t”.

    Furthermore, a change in policy at the highest, presidential level could easily make the Fed politically accountable for upholding both mandates as much as possible – even if that requires thinking outside the box.

  • InvestorX

    The dual mandate is a smoke screen to enable the extortion (FRL is a legalized fraud) by banks to be helped and abetted by the Fed (bailouts is guaranteeing the speculative gains of the bubble, QE1 was a fiscal gift and against the law, reflationary policies to allow dumping of toxic assets and write up of assets to allow for paper gains to be paid as real bonuses etc). The Fed fakes a public purpose to serve private interests.

    If banks are such a public utility they should be regulated as such, so that the Fed does not need to “enrich” them as much.

  • Dennis

    What a coincidence. I just read the “actual” law today, part of the Federal Reserve Act. Anon left out the title of section 2A of the Federal Reserve Act. “Section 2A. Monetary policy objectives” It’s just an objective! It’s a goal. Something to strive for. I think the Fed is doing pretty good considering the fact that the USA banks and the non-bank financial institutions that create all the debt dollars (e.g. “growth of credit”), are inhabited by 50-70% crooks.

    Federal Reserve Act
    Section 2A. Monetary policy objectives

    The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall 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 effectively the goals of maximum employment, stable prices, and moderate longterm interest rates.

    [12 USC 225a. As added by act of November 16, 1977 (91 Stat. 1387) and amended by acts of October 27,1978 (92 Stat. 1897); Aug. 23, 1988 (102 Stat. 1375); and Dec. 27, 2000 (114 Stat. 3028).]

  • Dennis

    The Fed’s objective is to control credit growth. During the period 2002-2008 they let the marketers of credit get totally out of control. What tool did Greenspan have, since he thought this was not a problem? Then things blew up. The credit extended went nearly worthless from the investors point of view (as we all know). Since 2009 the banks and non-bank creators of credit have not extended that much credit at all. The net increase of credit (debt dollars), has been zero. We saw the charts on this. “Control of credit growth” is the only real tool in identified in the 2A “mandate”. This seems to have been totally out of the Fed’s control. (Cullen has mentioned this FACT many times). It still is out of their control. Only Uncle Sam’s deficit spending has added to monetary growth. Bernake is left with one tool, engendering confidence in the Fed. I think we should give him some slack as we have already identified issues, but no solutions.

  • Andrew P

    I don’t think the Fed has the proper tools to maximize employment. This requires fiscal policy, not monetary policy.

  • Andrew P

    Expecting QE to reduce unemployment is like expecting a rain dance to bring rain. That is not what it does.

  • Martin T

    I am not expecting anything on that front.

    The reason uneployment is not falling faster is because of ZIRP, not because of QE

  • Andrea Malagoli

    No matter which economic theory one subscribes, the idea that employment can be controlled by playing with monetary policy can only come out of the demented mind of a self-deluded academic. Employment arises when there is “real” stuff to do in a “real” economy, like building something, servicing someone, and so on. To that end, the availability of cheap resources and a good balance between what people want/can buy and what is produced. Credit of course plays a big role, but mainly because it can help re-direct real resources to bad investments and therefore foster imbalances in the real economy.

    I know it is more complicated than that, but I also feel that we ought to get back to thinking of the economy as something made of people rather than financial assets.

  • DRR

    The Fed can ignite the conditions for asset inflation and if speculation provides more opportunity for profit than production( which is the case today) employment in the real world will suffer.

  • Andrea Malagoli

    Agreed. Not exactly a stellar record for Fed’s actions in the past …

  • Boomer

    Right!!! Someone like Larry Summers?

  • Captain America

    I want to know how so many people have fallen for this year after year? We all seem to think the Fed is omnipotent.

  • Johnny Evers

    We obsess over the mandate because a) it’s the law, and b) a healthy banking system should promote low inflation and regular employment.
    That’s the end game. We need to keep an eye on that, because if the Fed is helping banks but that doesn’t help the rest of us, then the Fed is doing something wrong.
    If we accept your position that the Fed really isn’t doing its job, where are you leading us? If it’s not the Fed’s job to promote full employment and low inflation, then who will do this?

  • widgetmaker

    To say that Fed policy has little/no effect on unemployment is delusional. Examine the counterfactual – if the Fed were to raise rates would that not have a detrimental effect on economic growth? The ZIRP, while not a panacea for today’s ill economy, fosters an environment where growth is more likely to occur.

    I think the FE mandate is a good thing. In my view, not enough focus has been put on society’s greatest problem. Millions of lives are being destroyed while people debate the hypothetical problems of debt and inflation. In many ways the labor force has been irreparably harmed – the long termers often never recover. And think about the harm that has done to their families.

    Adam Smith realized that the wealth of a nation is the product of its labor. So what is the point of economic policy? It should to make the lives of the men and women in the nation better. Congress is falling down on the job and the Fed can only do so. Any policy that can do more to enhance job creation should be the focus.

  • jtu

    Nice. So what you are saying is that not only is monetary policy impotent at the ZLB but also at all bounds! Ha ha, the monetarists are going to love you.

  • rharaz

    Could combining something like the “Chicago Plan” with the “Fair Tax” ( provide a more equitable solution for the average citizen, as compared to our current monetary & taxation systems? The Chicago Plan would impose full reserve banking, moving the money creation process to the federal government, and probably reduce the need for the Fed’s services. Using the Fair Tax’s prebate concept, the government could potentially have a way to more equitably transmit new monies into the economy. Including other components of the Fair Tax, it seems this combination could greatly accelerate new business development, and would aid small businesses in particular, since not just the rich or advantaged would have first access to newly created money.

  • Andrea Malagoli

    “if the Fed were to raise rates would that not have a detrimental effect on economic growth? The ZIRP, while not a panacea for today’s ill economy, fosters an environment where growth is more likely to occur.”

    No disrespect, but this is not “factual” because it is just a conjecture. Who know what would have happened if the Fed had a different approach combined with a completely different fiscal policy. On the other hand, the past actions of the Fed raise more questions about their effectiveness.

  • widgetmaker

    It is well established that easy money/lower interest rates spur economic activity. Once rates hit the ZLB monetary policy becomes less effective since rates cannot go below zero – so that leaves unconventional policy (QE) or better yet, fiscal policy, to stimulate the economy. But fiscal policy is completely outside the Fed’s purview – they cannot be held accountable for what the legislative branch does or does not do. So the Fed does what it can, but it is not enough.

    Are you saying that a better alternative would have been to keep interest rates higher? Look what happens when they are increased – see Europe, or just ask Paul Volcker.

  • Andrea Malagoli

    Monetary policy has only the power to control interest rates subject to the constraints of inflation.

    The extent to which inflation and interest rates can have an impact on unemployment is a rather debatable discussion. As far as I can tell, this is not related to monetary theory as much as it is related to this questionable thing called the Phillips curve. The Fed thinks that you can use the Phillips curve (already a far from robust relationship) in reverse and change unemployment by changing inflation. Now, I can see why in a growing economy unemployment would go down as normal inflation increases, but I do not see the causality working in reverse as strongly.

    Yes, low interest rates can help, but the clear recent evidence is that monetary policy alone has a very weak impact. While it may have averted a bigger crisis, unemployment is still pretty high considering the extent of the QE program.

    To think that the Fed should have a “mandate” on unemployment is the delusional part.

  • Andrea Malagoli

    “It is well established that easy money/lower interest rates spur economic activity”

    I think it is far less established than what the “common wisdom” implies.

    You also keep thinking that “QE” is an economic stimulant when it is only a tool to keep the banking system functioning and it can also have deflationary effects.

    As an aside, the “true” economic stimulus has been the growth in government spending, which has been partly helped by low interest rates and has made up for a lot of lost spendable interest income.

  • widgetmaker

    I would say it is conclusive that low interest rates, absent inflation, are more accomodative to economic growth and employment than higher rates. And that is where we are today.

    As far as the impact of monetary policy is concerned, I agree it has its limits, but the Fed cannot be criticized for doing all it can do (I would say that they should be even more expansionary). Just because monetary policy alone cannot solve our economic problems does not mean it is a failure. It just can’t do it in a liquidity trap. As I keep saying, we are dealing with two separate branches of govt here. One, the Fed, is being very accomodative, while the other, Congress, is obstructing recovery (sequestration). The fact that they averted a much bigger crisis is significant.

    Now the Fed cannot cure our economic ills alone, but it can be helpful (and it could even make things worse by tighening too soon). And as far as a “mandate”, should not the Fed take into account unemployment as well as inflation when setting policy? Or do you believe that the rate of inflation – “sound money” – should be the only concern?

  • Andrea Malagoli

    I think that the Fed CANNOT have a mandate to even watch unemployment because the Fed has no real control on unemployment. It makes no sense to target the extent on QE or other stimuli to reaching a given target of unemployment, unless one believes in these things like NAIRU. These, as well as accomodative government fiscal policies, are legacies of the mainstream Keynesian ideology, which I do not subscribe to.

    As far as I can tell, all the Fed can do is to manage interest rates to help maintain a stable banking system. In doing so, the Fed is constrained by inflation but it cannot manipulate it. The Fed does NOT control the amount of money in circulation.

  • widgetmaker

    To say the Fed cannot affect unemployment is tantamount to saying that the Fed has no influence on the overall economy. Review the economic history when in 1979 Paul Volcker came in and jacked up interest rates driving the US into recession. Seemed to have a profound effect on the economy and the unemployment rate if you ask me.

  • Nils

    It’s not really that the Fed is doing something wrong. It’s just that the policy is insufficient.

  • LXDR1F7

    I dont think the monetary authority should target real economic measures like employment. It should only target nominal measures like CPI or the money supply. Employment is the government’s responsibility as its more of a qualitative or real measure.

    The monetary authority should just be in charge of providing the most efficient monetary system to underpin the functioning of the real economy with the real economy directly targeted by the economic government.

  • LXDR1F7

    Monetary policy can only indirectly affect real economic measures like unemployment by creating the most efficient monetary system to underpin the real economy.

    Therefore the fed shouldnt have things like employment on its mandate.

  • LXDR1F7

    Under the current system yes. But we can easily reform the fed so it conducts policy directly with the public instread of the banks.

  • Syd

    “The Fed’s objective is to control credit growth. During the period 2002-2008 they let the marketers of credit get totally out of control.”

    What if, instead of the current dual mandate, the Fed’s mandate really was to control credit growth? That seems like what is really needed. The enormous growth of private sector debt relative to incomes was what brought on the balance sheet recession. Can’t the Fed manage credit growth with interest rates, reserve requirements, and other regulation? Wouldn’t managing the growth of credit so that it bears some rational relationship to income growth help to reduce the severity of recessions and financial crises?

    During the up part of the cycle, banks act as if maximizing credit growth is the goal. For them maybe it is, if the Fed always stands ready to float them over the rocky shoals of imprudent lending.

  • Dennis

    Exactly! Certainly the Fed has the power to keep credit Growth under control. They just don’t have the power to cause credit growth if the banks don’t cooperate. When interest rates are high you would think credit growth would be lower. I have looked at the charts, this doesn’t happen. Instead, higher interest rates bring out the telemarketers, pushing the sale of credit. Let’s see…would marketers of credit cold call folks if the interest rates were 2-3% or 8-12%? Also, they can easily find a million reasons why they can’t refi your 8% loan. We need an Uncle Sam bank to at least compete with these crooks. He already owns Freddie and Fanny with trillions in “assets”, lets make a US bank!

  • Dennis

    BTW Syd, the “mandate” says that: “… the Fed…shall 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 dual mandate]“.

    The only tool 2A specifically sets out IS to control credit growth. How often has Cullen pointed out that out of control inflation is caused by a country diluting its currency way beyond that country’s production ability? Lots Recall that money creation is largely the job of banks via loans. USA banks went overboard on that 2002-2008, and now they don’t even keep up thanks to deleveraging.

  • widgetmaker

    “Monetary policy can only indirectly affect real economic measures like unemployment”

    Precisely! The Fed through its influence on the money supply merely moderates the environment where businesses transact. It is their role to either expand or contract the supply through interest rate manipulations and open market operations.

    So are you saying that the Fed, in deciding which course to pursue – loosening or tightening – should completely disregard the level of unemployment in the economy? I believe that should be a major consideration in their decision making process. To me, that is the meaining of the FE mandate. After all, they are working for the American people.

  • Syd

    “…shall maintain long run GROWTH OF the monetary and CREDIT aggregates commensurate with the economy’s long run potential to increase production…”

    Interesting – thanks for pointing that out Dennis. Too bad the Fed doesn’t actually do that.

    I guess it gets back to the point of Cullen’s post: the Fed’s real purpose is to “make sure the banks are healthy.” Except I don’t think the big banks really are healthy. Thanks to the Fed they’ve remained liquid and open for business, so that the payments system functions, but at a very steep price. There are better uses for that money.

    See this table for household debt to income ratio growth, especially from the mid-80s on (i.e., the Greenspan/Bernanke era).

    The household debt to income ratio doubled but the Fed didn’t act. Inflation was moderate, unemployment low, and GDP growth moderate (mid-80s through 2007, the Great Moderation), so the Fed was passive in the face of a household debt bubble.

    Your point is well taken that the Fed can’t make private credit grow if the banks don’t want to cooperate, i.e., after the bust. To me though it’s misguided to keep trying to revive the growth of household debt while income growth remains stagnant, which is ostensibly part of the goal of ZIRP/QE. Households need income growth, not debt growth.

  • Dan

    Paul Volcker’s take:

    I know that it is fashionable to talk about a “dual mandate”—the claim that the Fed’s policy should be directed toward the two objectives of price stability and full employment. Fashionable or not, I find that mandate both operationally confusing and ultimately illusory. It is operationally confusing in breeding incessant debate in the Fed and the markets about which way policy should lean month-to-month or quarter-to-quarter with minute inspection of every passing statistic. It is illusory in the sense that it implies a trade-off between economic growth and price stability, a concept that I thought had long ago been refuted not just by Nobel Prize winners but by experience.

    The Federal Reserve, after all, has only one basic instrument so far as economic management is concerned—managing the supply of money and liquidity. Asked to do too much—for example, to accommodate misguided fiscal policies, to deal with structural imbalances, or to square continuously the hypothetical circles of stability, growth, and full employment—it will inevitably fall short. If in the process of trying it loses sight of its basic responsibility for price stability, a matter that is within its range of influence, then those other goals will be beyond reach.