Advancing a Free Society

End the Fed’s Dual Mandate and Focus on Prices

Monday, September 19, 2011

In 1977, Congress first gave the Federal Reserve a dual mandate to promote both “maximum employment” and “stable prices.” At the Republican presidential debate on Sept. 12, the major candidatesargued that the Fed should instead focus squarely on the goal of long-run price stability.

Responding to a question about the Fed, Rick Santorum said: “make it a single charter instead of a dual charter” institution, and no candidate disagreed. Most piled on. “Its focus needs to be narrowed,” said Herman Cain. “We need to have a Fed that is working towards sound monetary policy,” said Rick Perry. “The Federal Reserve has a responsibility to preserve the value of our currency,” said Mitt Romney.

Some worry that a single focus on the goal of price stability would lead to more unemployment. But history shows just the opposite. A single mandate wouldn't stop the Fed from providing liquidity, or serving as lender of last resort, or reducing the interest rate in a financial crisis or a recession. But it would make it more difficult for the Fed to engage in the kinds of discretionary actions that frequently have resulted in higher unemployment.

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