Tuesday, April 28, 2015

About that Dual Mandate...

George Selgin says we should do away with it:
The Federal Open Market Committee is in a pickle. After its last meeting, it suggested that it would soon start raising interest rates as a way to head off inflation. Recent inflation numbers, showing an uptick in the core inflation rate, make that step seem as necessary as ever.

But disappointing growth projections, along with the dollar's international appreciation, are giving committee members cold feet.

The FOMC's dilemma is rooted in the Fed's so-called "dual mandate," calling for it to achieve both "maximum employment" and "stable prices." Whenever inflation and employment seem to be headed in opposite directions, the Fed has to compromise.

Wrong compromises aggravate the business cycle; and even if the compromises are correct, the Fed's uncertain direction puts a damper on growth.

Realizing its flaws, some favor just scrapping the dual mandate's "maximum employment" clause, leaving the Fed with a solitary inflation target.

The dual mandate's champions reply that, while inflation targeting might make monetary policy more predictable, it could also call for the Fed to tighten at times — the present might just be one of them — when doing so means putting the brakes on an already slowing economy.

So what's best, a slippery dual mandate or a stable-inflation straitjacket? Neither.
You will have to read the rest of his article to find out what he thinks should replace the dual mandate. Here is a hint: he agrees with my vision for narrowing the Fed's mandate.


  1. I would really prefer it if the fed had a triple mandate.

  2. Why do we even care about inflation anyway? I know this seems a stupid question, but a really clear answer is needed. Stable/low inflation can only ever be a means to an end, not an end in itself.

    (Except, of course, for a certain kind of rich person owning fixed-income securities. Their selfish interest calls for low inflation, even deflation, no matter the damage to everyone else. But let's hope we can stop them from bribing and bullying the authorities.)

    So, given that inflation is a means, what is the end to which it is directed? Once we know that answer, we can build it into the mandate.

  3. Honestly I think the dual mandate is better then what the ECB is doing with a single mandate, but ultimately I think the biggest problem is that the US government and FED need to work together in unison rather then separately.

    You kind of cover this idea in your Nominal GDP idea, but you talk about it only from the perspective of the FED. I disagree with this because the US government plays a role in this as well, but currently is so unstable that it is powerless.

    Let's say it's 2008 all over again... The US government can cut taxes and increase spending on projects (as it somewhat did) while the FED provided liquidity (as you say). During boom times (such as the time we are entering nearing full employment) the US government should raise taxes and earn surpluses while the FED reduces liquidity in the market.

    Both the FED and US government can do this through there respective powers. Increasing taxes takes liquidity out of the market the same way the FED increasing interest rates does. However, Republican economic ideas work contrary to this during boom times and Democratic ideas only work in conjunction with this idea during bad times. These need to start working together in unison and we would have a much stabler environment where the US government is reducing Bond's by running surpluses during booms. This keeps interest rates low and decreases money supply which helps control inflation.

  4. Single or dual mandate? Silly question in that with inflation targeting alone a central bank is implicitly also targeting employment. That is, what increases inflation is not just demand: it’s aggregate demand being high or excessive relative to aggregate supply. And the ultimate source of all supply is labor. Thus if inflation is as high is as acceptable there is a very good chance that employment is as high as is feasible.