The president of the Federal Reserve Bank of Minneapolis, Narayana Kocherlakota, recently indicated that the Federal Reserve is unable to fulfill the additional (“dual”) mandate imposed on it in 1978.
President Carter signed the Full Employment and Balanced Growth Act (a.k.a. the “dual mandate”) on October 27, 1978. It was sponsored by Representative Augustus Hawkins (D-CA) and Senator Hubert Humphrey (D, MN) and is commonly known as the Humphey-Hawkins Act. This congressional legislation mandated the Federal Reserve Bank to promote employment and economic growth while reducing the federal budget deficit, in addition to its original goal of maintaining price stability.
Dr. Kocherlakota now suggests fiscal policy will be more effective than monetary policy in dealing with employment at this point in the economic cycle, due to demographic and regulatory limitations. He believes additional monetary stimulus may be highly inflationary.
He has said that the Federal Open Market Committee (FOMC), the policy making committee of the Federal Reserve, “faces an especially large amount of uncertainty about the level of maximum employment that it can hope to achieve [and] has no control over” factors related to unemployment as compared with tax (fiscal) policy.
In my article on Modern Economists 18 months ago, I quoted Dr. Kocherlokata as follows:
"I believe that during the last financial crisis, macroeconomists (and I include myself among them) failed the country, and indeed the world.”
He went on to say, “In September 2008, central bankers were in desperate need of a playbook that offered a systematic plan of attack to deal with fast-evolving circumstances. Macroeconomists should have been able to provide that playbook. It could not. Of course, from a longer view, macroeconomists let policymakers down much earlier, because they did not provide policymakers with rules to avoid the circumstances that led to the global financial meltdown."
In the three decades following Humprey-Hawkins, total debt (private and public) as a percentage of income ballooned four-fold, from 100% to 400%, causing the global financial crisis. It seems the Fed’s policies have been severely misguided during that time. Perhaps, Dr. Kocherlokata’s comments will cause the Federal Reserve to return to its original mandate of price stability.
In my view, price stability is predicated on a stable money supply that cannot be readily manipulated. This requires a medium of exchange supported by real assets, such as gold.
A stable medium of exchange will actually enable strong, sustainable employment and economic growth while reducing the federal deficit, the goal of the Humphrey-Hawkins Act, without having to legislate it.
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