The Fed's dual mandate, explained

What the statute actually says

The Federal Reserve Act directs the Board and the Committee to promote “maximum employment, stable prices, and moderate long-term interest rates.” Three goals are named. The shorthand everyone uses is the dual mandate, because moderate long-term rates are treated as a consequence of the other two rather than a separate lever.

Neither of the two headline goals is defined in the statute. Congress wrote the ends and left the means — and the definitions — to the central bank. That is a delegation of power over the quantity of money, not a formula the Committee is merely administering.

Only one of them has a number — and it is not in the law

The Fed has adopted an explicit target for stable prices: 2 percent inflation over the longer run, measured by the price index for personal consumption expenditures. That is a choice by the Committee, not a figure Congress wrote, and it was only stated publicly in 2012.

Two percent a year is not price stability in the ordinary sense. It is a decision to raise the price level on a path that roughly doubles over a working lifetime. Households on fixed incomes, retirees, and anyone holding cash or a bond that does not reprice pay that tax. See what causes inflation for the monetary arithmetic.

Maximum employment has no such number, and the omission is deliberate. The Committee says the highest employment the economy can sustain without generating inflation shifts with demographics, technology and participation. That is true as far as it goes. It is also convenient: a target you never state is a target you cannot be shown to have missed. The Committee assesses a range of indicators rather than naming a rate it would have to defend.

The arithmetic the mandate does not repeal

Sustained inflation is produced by money growing faster than output. The dual mandate does not change that. A Committee that holds the federal funds rate too low, or that enlarges its balance sheet, has chosen a higher path for prices whether or not employment is its reason.

“Looking through” a supply shock, or easing because the labour market has softened while prices are still rising, is the same kind of choice. The employment half of the mandate is not an alibi for easy money. It is a second objective that has to be pursued subject to the constraint that money not outrun output. When it is pursued by violating that constraint, households pay later in the price level.

When they conflict

Most of the time a weakening economy brings both slower growth and slower price increases, so looser policy is sold as helping both. That is the easy case, and it is the one that produces the least public argument.

The hard case is when inflation is high and the labour market is deteriorating at the same time. Policy tight enough to bring prices down makes unemployment worse; policy loose enough to protect jobs lets inflation persist. There is no formula that resolves this. The Committee weighs how far each goal is from its objective — and the balance it strikes is a decision about who pays now versus who pays in the currency.

That choice shows up in the wording of the statement before it shows up in the rate. It also shows up, later, in the CPI and in the unemployment rate on this page.

How to read the coverage

• “The Fed is balancing both sides of its mandate” — it is choosing. Ask which goal it is further from, and who absorbs the gap.
• “Stable prices” / “the 2 percent target” — 2 percent is the Committee’s number, on PCE, not CPI, and not in the statute. It is a path for the price level, not a freeze.
• “Maximum employment” has no number. A story that says the Fed “targets” a specific unemployment rate has misread the statute.
• “The mandate forced them to…” — the statute names ends. The means, including how much money to create, remain a decision.