WASHINGTON, DC - SEPTEMBER 13: Chairman of Fed...

Fed’s Dual Mandate

The Federal Reserve was chartered on December 23, 1913, with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907.

Congress established three key objectives for monetary policy in the Federal Reserve Act:

  • Maximum employment,
  • Stable prices, and
  • Moderate long-term interest rates.

The first two objectives – maximum employment and stable prices are sometimes referred to as the Federal Reserve’s dual mandate.

Over the years, the Fed’s duties have expanded to include conducting the nation’s monetary policy, supervising and regulating banking institutions, maintaining the stability of the financial system and providing financial services to depository institutions, the U.S. government, and foreign official institutions, as well as conducting research on the economy and releasing publications such as the Beige Book.

But it seems that the Fed’s mandate to increase employment has been lost somewhere along the way. Under former chairman Alan Greenspan, employment was hardly mentioned.


To Boldly Go Where None Have Gone Before

On Wednesday, December 12, 2012, Ben Bernanke made history at the Federal Reserve when the FOMC announced more quantitative easing at a rate of $85 billion a month for an extended period of time.  The open-ended quantitative easing policy was already an historical first, and now Chairman Bernanke has made a revolutionary move: for the first time, the FOMC is moving from a calendar-based guidance to one tied to economic factors, specifically, inflation and unemployment (which constitute the Federal Reserve’s dual mandate) The Chairman announced that interest rates would remain near zero until such time as the unemployment rate falls below 6.5% and inflation projections remain no more than half a percentage point above 2% two years out. Here are the highlights:
  • The Fed’s new program will consist purely of Treasury purchases.  Combined with QE3, the Fed will be taking $85 billion in bonds, both Treasuries and MBS, out of the market, and will begin rolling over its maturing Treasuries as of January.
  • The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent.
  • The Committee currently anticipates that this exceptionally low range for the federal funds rate will continue at least as long as the unemployment rate remains above 6-1/2 percent, and inflation between one and two years ahead no more than a half percentage point above the Committee’s 2 percent longer-run goal, with longer-term inflation expectations well anchored.

A Breath of Fresh Air and a Lifesaver

With all the talk of the “fiscal cliff” which Congressional Republicans are using as a cover to promote austerity measures that will single out the middle and low income Americans for sacrifice, Ben Bernanke’s efforts to help the average American are a stand out. As Washington Post’s Wonkblog puts it:

…for five years running, the Fed under Chairman Ben S. Bernanke has had a remarkable track record of moving creatively, aggressively, and quickly to try to ease policy and get the U.S. economy on track — usually more creatively, more aggressively, and more quickly than those who spend their days watching the Fed thought possible.

While Alan Greenspan did his best to lower expectations of the Fed, Ben Bernanke has applied his sharp academic mind to solving problems.

Of course, monetary easing has its critics – mostly among the very wealthy who believe that money should be scarce and that the government’s job is to circulate it back to them. An analogy is to warn a lifeguard not to throw a lifesaver to a drowning man because it might hit him on the head and kill him. But Chairman Bernanke has rejected that fatalism:

He instead rolled up his sleeves and put his own considerable brainpower and that of hundreds of Fed economists into understanding why the Fed’s earlier stimulus hadn’t packed more punch, and whether a different approach might do the trick. He steered his colleagues on the Federal Open Market Committee through a debate that has lasted more than a year.

This approach sends a message to busi­ness­ peo­ple and consumers that the Fed won’t tighten policy and choke off a recovery until the unemployment crisis is being solved or inflation becomes a real problem. As a result, borrowing costs will fall, helping buffer the effects of bad developments like a fiscal cliff fail. It will give businesses and consumers greater incentive to deploy cash rather than hoard it.

Critics Be Damned

Conservative critics will predictably moan about his “debasement of the currency,” and conspiracists will put forth oddball theories about a banker’s coup, but the simple fact is this: Chairman Bernanke took a great deal of criticism for his part in the bailout of the Wall Street investment bankers who caused the problem, so he really does owe something to Main Street as well, doesn’t he? After all, it’s Main Street that drives the economy, and generates the money that Wall Street gets to play with.

Bernanke made his career studying the errors of central bankers in the Great Depression and in 1990s Japan. He made a strong case that more forceful monetary policy would have lifted those economies. So it seems that he has been driven to avoid repeating the mistakes of history who, according to the Washington Post, “were culpable for unnecessary misery heaped upon their people.”

President Obama may appoints a new person to take over the Fed chairmanship in January 2014. Let’s hope he chooses to keep Ben Bernake, whose legacy will be one of pushing the envelope to bring monetary policy to address great economic challenges.