The Federal Reserve’s
(Fed’s) current statutory mandate calls for it to “promote effectively the goals
of maximum employment, stable prices, and moderate long-term interest rates.”
Some economists have argued that this mandate should be replaced with a
single mandate of price stability. Often the proposal for a single mandate
is paired with a more specific proposal that the Fed should adopt an
inflation target. Under an inflation target, the goal of monetary policy would be
to achieve an explicit, numerical target or range for some measure of price
inflation. Inflation targets could be required by Congress or voluntarily
adopted by the Fed as a way to pursue price stability, or a single mandate
could be adopted without an inflation target. Alternatively, an inflation
target could be adopted under the current mandate. In January 2012, the Fed
voluntarily introduced a “longer-run goal for inflation” of 2%, which some
might consider an inflation target.
In the 112th Congress, H.R. 4180 and H.R. 245 would strike the goal of maximum
employment from the mandate, leaving a single goal of price stability.
H.R. 4180 also requires the Fed to adopt an inflation target; H.R. 245
does not. Were a single mandate to be adopted in the United States, it would
follow an international trend that has seen many foreign central banks adopt
single mandates or inflation targets in recent decades.
Arguments made in favor of a price stability mandate are that it would better
ensure that inflation was low and stable; increase predictability of
monetary policy for financial markets; narrow the potential to pursue
monetary policies with short-term political benefits but long-term costs; remove
statutory goals that the Fed has no control over in the long run; limit policy
discretion; and increase transparency, oversight, accountability, and
credibility. Defenders of the current mandate argue that the Fed has
already delivered low and stable inflation for the past two decades,
unemployment is a valid statutory goal since it is influenced by monetary
policy in the short run, and discretion is desirable to respond to
unforeseen economic shocks. A case could also be made that changing the
mandate alone would not significantly alter policymaking, because Fed discretion,
transparency, oversight, and credibility are mostly influenced by other
factors, such as the Fed’s political independence.
Discontent with the Fed’s performance in recent years has led to calls for
legislative change. It is not clear that a single mandate would have
altered its performance, however. Some of the criticisms, including lax
regulation of banks and mortgages and “bailouts” of “too big to fail” firms,
were authorized by statute unrelated to the Fed’s monetary policy mandate. The
criticism that the Fed was responsible for the depth and length of the
recession arguably leads to the prescription that monetary policy should
have been more stimulative; it does not follow that more stimulus would
have been pursued under a single mandate. Whether or not the Fed allowed the housing
bubble to inflate, it is not clear that a single mandate would have changed
matters since the housing bubble did not result in indisputably higher
inflation. Some economists believe that the Fed’s recent policy of “quantitative
easing” (large-scale asset purchases) will result in high inflation.
Inflation has not increased to date, but even if these economists are correct,
the Fed has discretion to pursue policies it believes are consistent with
its mandate. It has argued that quantitative easing was necessary to
maintain price stability by avoiding price deflation, and it could still
make this argument under a single mandate.
This report discusses a number of implementation issues surrounding an
inflation target. These include what rate of inflation to target, what
inflation measure to use, whether to set a point target or range, and what
penalties to impose if a target is missed.
Date of Report: March 13, 2012
Number of Pages: 26
Order Number: R41656
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