Tags: Money | Federal Reserve | dual mandate

What Is the Fed's Dual Mandate?

By    |   Wednesday, 01 July 2015 06:40 PM

The Federal Reserve’s so-called dual mandate of maintaining stable prices along with maximum employment arose from the Federal Reserve Act after it was amended in 1977 as the Federal Reserve Reform Act.

According to ChicagoFed.org, the dual mandate calls on the Fed's Board of Governors and its Federal Open Market Committee to maintain twin objectives of "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."

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The dual mandate was written into the Federal Reserve Act as part of a three-pronged strategy that also includes moderating long-term interest rates, and it guides the current chairwoman Janet Yellen's thinking still today, The Wall Street Journal reported.

The Journal added that the dual-mandate has drawn political criticism from some Republicans who believe such a strategy that is focused on employment management keeps the Fed away from a stronger goal of lowering inflation.

In 2012, the Federal Open Market Committee issued a statement clarifying its goals on monetary policy moving forward, according to its website, FederalReserve.gov.

It said that inflation at 2 percent is most closely aligned with the Fed's statutory mandate.

"Communicating this inflation goal clearly helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the FOMC's ability to promote maximum employment," the Fed noted on its website.

It did not set a goal for maximum employment, noting that decisions on such a policy "must be informed by its members' assessments of the maximum level of employment, though such assessments are necessarily uncertain and subject to revision." Normal unemployment, it noted after a March 2015 committee meeting, leaned from 5.0 percent to 5.2 percent.

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While the committee said its objectives of employment and inflation control are typically complementary, when they are not, it noted in its statement that it will pursue "a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate."

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The Federal Reserve's so-called dual mandate of maintaining stable prices along with maximum employment arose from the Federal Reserve Act after it was amended in 1977 as the Federal Reserve Reform Act.
Federal Reserve, dual mandate
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2015-40-01
Wednesday, 01 July 2015 06:40 PM
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