Dual Mandate

Testifying before a congressional committee, a Federal Reserve official says the Board is weighing "both halves of our statutory mandate." The two objectives conventionally described as the Federal Reserve's dual mandate are:

1. A.A balanced federal budget and full employment.Incorrect. A balanced budget is a fiscal objective that belongs to Congress and the President, not to the central bank. The Fed has no budget authority.
2. B.Stable prices and a stable foreign exchange value of the dollar.Incorrect. Stable prices is one of the two, but exchange rate policy is primarily a Treasury responsibility. The Fed does not target a level for the dollar.
3. C.Maximum employment and stable prices.Correct. These are the two objectives conventionally called the dual mandate, and the tension between them frames virtually every policy decision.
4. D.Maximum real economic growth and a balanced trade account.Incorrect. The Fed does not target a growth rate or the trade balance. Employment and prices are the mandated objectives.

Why: Congress directs the Federal Reserve to promote maximum employment and stable prices. (The Federal Reserve Act also lists moderate long-term interest rates, but the goals are conventionally referred to as the dual mandate, and moderate long-term rates are generally understood to follow from achieving the other two.) Every policy debate about whether to tighten against inflation or ease to support the labor market is a debate about the tension between these two objectives.

A client asks why the Federal Reserve did not simply cut taxes to revive employment during a downturn. The best explanation is that the Federal Reserve's statutory mandate and toolkit:

1. A.Permit it to set tax rates but not to influence interest ratesThis is exactly backwards; the Fed influences rates and has no taxing power.
2. B.Require it to target a balanced federal budget above all other goalsBudget balance is a fiscal matter and is not part of the Fed's mandate.
3. C.Direct it toward maximum employment and stable prices using monetary tools, while taxing and spending remain with Congress and the PresidentCorrect. The dual mandate is pursued with monetary instruments; fiscal policy belongs to the elected branches.
4. D.Limit it to regulating banks, with no responsibility for employment or inflationBank supervision is one Fed function, but the dual mandate expressly covers employment and prices.

Why: Congress directs the Federal Reserve to pursue maximum employment and stable prices, goals commonly called the dual mandate. The Fed pursues them through monetary tools such as open market operations, the discount rate, reserve requirements and the interest it pays on reserve balances. Taxing and spending are fiscal policy, which belongs to Congress and the President; the Federal Reserve has no authority to set tax rates or appropriate funds.