The Fed’s “Dual Mandate”

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When congress passed the Federal Reserve Act in 1913, they established our nation’s independent central bank, and outlined the purpose of the bank.  Section 2A of the act sets this purpose:

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.

This section outlines what economists call the “dual mandate” of the Fed: a balance between price stability (i.e., inflationary control) and full employment.  When one is out of balance, the Fed will act to adjust monetary policy in order to restore the balance.  For example, in 2009, when the U.S. was experiencing the worst economic cycle in nearly a decade, unemployment hit nearly 10%.  The Federal Reserve used the policy tool known as Quantitative Easing to increase the money supply and lower interest rates, with the goal being for businesses to invest money in production and hire more workers.

The risk to this strategy is that the Fed may actually take a step too large for the economy to handle.  The U.S. economy has been compared to a large ship, and monetary policy is the steering wheel.  The ship turns very slowly and has a lot of momentum;  by the time you know you’ve turned the wheel too far, it can be too late to do anything about it.  There are many opinions as to how well the Fed Chairman Ben Bernanke is steering the ship. I would be curious to hear yours.

By Peter LaTona, Vice President of Sales at APMEX

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2 thoughts on “The Fed’s “Dual Mandate”

  1. At this juncture, after two huge Quantitative Easings and billions in virtually interest-free loans to banks worldwide, it should become apparent that monetary policy is not working. The most important thing the Fed could do to improve the employment picture is to stop printing money to prop up bankrupt and criminal banks and insure that these institutions have the capital reserves necessary to meet their obligations to depositors.

    The only way we can restart the economy is to increase demand and that means funnel money into the hands of those who have less of it and who are compelled to spend it on goods and services. The only entity with that kind of market clout is the federal government and it needs to obtain the revenues necessary to increase spending on job-creating programs like infrastructure improvements and expansion, and delivering services to those in need. Another absolutely essential step is the criminal prosecution of those financial executives and institutions whose fraudulent activity caused the current crisis. We cannot restore trust in our financial institutions if we allow criminals to evade accountability for their crimes.

  2. Between the influence of the current administration, financial institutions, unions and politicians, the oiginal mandate may have been adjusted to produce a more user friendly result. Translation: Bernanke does what Obama tells him to do.

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