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Opinion from a Libertarian ViewPoint

The Fed’s “Full Employment” Mandate Is a Mandate for Inflation

Posted by M. C. on September 21, 2022

Over time, repeated referenced to “the dual mandate” were really just calls for continued activist monetary policy and even for the wildly experimental “unconventional monetary policy” employed after 2008. 

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https://mises.org/wire/feds-full-employment-mandate-mandate-inflation

Ryan McMaken

In recent years, Congress has attempted to add various new mandates to the Federal Reserve’s mission. In 2020, Democrats introduced the “Federal Reserve Racial and Economic Equity Act.”  Then, in 2021, pundits and politicians were telling us that it’s the Fed’s job to “combat climate change.” These are just the latest efforts to use the enormously powerful central bank to achieve political ends to the liking of elected officials.

This is a helpful reminder, of course, that the Fed is not independent from politics. The Federal Reserve has never been politically independent, and it certainly isn’t so now. Fed independence is a fairy tale academic economists like to tell their students. The debate over new mandates has also highlighted the fact the Fed already has no fewer than three mandates explicitly written into law: moderate long term interest rates, maximum employment, and stable prices

In practice, however, the Fed has only two mandates because the Fed is so limited in what it can do to target long term interest rates in a global marketplace. This has led to what is now a de facto “dual mandate.” 

This dual mandate is now all about maximizing employment while also maintaining “stable prices.” What this all means is never precisely spelled out in policy or law. It also changes over time. zero-percent CPI inflation was once the goal. Now the goal is the arbitrary two-percent standard. Similarly, what is meant by “maximum employment” is subject to the arbitrary definition of “full employment.”

In any case, it has been the view of central bankers for decades that one of the easiest ways to “maximize” employment is to embrace accommodative monetary policy. This, however, works counter to the mandate of stable prices by inflating the money supply. This leads to price inflation in the medium to long term. 

So, the two mandates are essentially at odds. So which half of the mandate to focus on or emphasize? That’s up to the Fed. 

In practice, however, experience suggests that the Fed tends strongly toward embracing the “maximum employment” side of the equation. Time and time again, central bankers have chosen to downplay the stable-prices mandate and embrace expansive monetary policy. 

How the Fed Favors Maximum Employment 

As a de facto instrument of the federal government, Federal Reserve policy tends to focus on what the federal government focuses on. So, the Fed was moved in the direction of greater focus on employment with the passage of the Employment Act of 1946. The Act stated

The Congress hereby declares that it is the continuing policy and responsibility of the federal government to use all practicable means consistent with its needs and obligations and other essential considerations of national policy with the assistance and cooperation of industry, agriculture, labor, and state and local governments, to coordinate and utilize all its plans, functions, and resources for the purpose of creating and maintaining, in a manner calculated to foster and promote free and competitive enterprise and the general welfare, conditions under which there will be afforded useful employment for those able, willing, and seeking work, and to promote maximum employment, production, and purchasing power.

Although highly controversial at the time, the belief that the federal government ought to intervene to maximize employment—whether through fiscal or monetary policy—became well accepted over time. In terms of Fed policy following the adoption of the act, Allan Meltzer—author of a huge history of the Federal Reserve—concludes that “Interpretations of the 1946 Employment Act usually emphasized primacy of full employment.” In other words, the bias was in favor of easy money and intervention designed to stimulate the economy so as to ensure higher employment numbers. 

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One Response to “The Fed’s “Full Employment” Mandate Is a Mandate for Inflation”

  1. Eric said

    Reblogged this on Calculus of Decay .

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