Published December 01, 2010
A Federal Reserve bank president Wednesday weighed into an emerging battle in Washington over the central bank’s long-standing “dual mandate,” which requires it to give equal weight to fighting inflation and creating jobs when it sets interest rate and other monetary policy.
In an interview with Fox Business, James Bullard, the president of the Federal Reserve Bank of St. Louis, said “it would be OK with me” if Congress approved new legislation from conservative Republicans to eliminate the dual mandate.
Bullard appeared to break ranks with the Fed’s board of governors in Washington, which supports maintaining the existing directive.
“The only thing the Fed can do in the long run is control the inflation rate,” Bullard said. “And even though we have a dual mandate, we say that our best contribution to the dual mandate is to provide a stable price backdrop for the economy. Then that gives businesses and households a good platform from which they can make all of their decisions--let markets work. And then you get the best allocation of resources that you can.”
Republican critics say the dual mandate is pushing the Fed to embrace potentially harmful stimulus measures to jumpstart job creation—specifically, a new round of so-called “quantitative easing.” Critics worry the Fed’s moves will lay the foundation for higher inflation, a weaker dollar and global economic instability.
The Fed approved more quantitative easing last month, announcing plans to purchases up to $600 billion more in Treasury securities, to help push interest rates even lower on mortgages, auto loans and business loans. In its announcement, the Fed said economic growth has been “disappointingly slow,” which has helped to keep the unemployment rate “elevated.”
But Rep. Mike Pence (R-IN) has introduced legislation to limit such moves. It would require the Fed to focus “exclusively” on “price stability” – inflation –“and protecting the dollar.” In the Senate, Sen. Bob Corker (R-TN) supports the measure.
“Unfortunately, judging from the latest round of quantitative easing…the Federal Reserve hasn’t gotten the message,” Pence said last month. “Printing money is no substitute for sound fiscal policy.”
It’s a weedy, arcane war over a handful of words—but one that, if Pence and Corker are successful, could have a big impact on future Fed policy—on future interest rates, loan availability, job creation and more.
In most countries, central banks are charged only with policing inflation. But in the U.S. in 1977, Congress adopted the Fed’s dual mandate, giving it two equal goals: maintain price stability with maximum employment. Politicians wanted to assure that Fed moves such as raising interest rates did not jeopardize jobs.
No one expects Congress to change that directive anytime soon. But the push by Pence and Corker cannot be dismissed. As part of financial regulation reform Congress approved earlier this year, Republicans won new limits on the Fed’s powers and increased transparency and oversight of Fed operations. Many of them – and some Democrats – blamed the Fed’s low interest rate policies and alleged lack of bank oversight for the financial crisis and the subsequent taxpayer-funded bank bailouts.
In January, Republicans will take control of the House and will hold more seats in the Senate.
Supporters of the dual mandate say it has worked to balance Fed actions. Just yesterday, at an event with business leaders in Ohio, Fed chairman Ben Bernanke said job creation is "probably the most important economic issue facing America today…At the pace of growth we're seeing, we're not growing fast enough to materially reduce the unemployment rate."
“The Federal Reserve is not seeking a change to its statutory mandate,” a Fed spokesperson said Wednesday. “The dual mandate is appropriate.”
But Bullard said he did not oppose changing it.
“You could make that more explicit and just say, 'the Fed's in charge of inflation' -- that's the way the ECB (European Central Bank) has it,” Bullard said. “But no matter where you are in the world, the only thing that your central bank can do is control inflation in the long run. All the things on the real economy are due to real factors--technology and preferences in the economy."
“I thought we had clarity on that,” he added. “I thought the rhetoric that we've used for at least 20 years is that we're going to provide a stable price backdrop and let the private sector decide how to allocate resources.”
The Fed’s 12 regional bank presidents are known for their more independent streaks – sometimes -- and do not always agree with the central bank’s board of governors in Washington.