Since Jerome Powell has been Federal Reserve chairman, especially as his term renewal approached earlier this year, the central bank and its members have, with great frequency, referred to their “dual mandate.”
That is not a coincidence. The Fed is under pressure by progressives to run the most accommodative policy possible.
Progressives who had their policy goals stifled in the Senate have sought an alternate way to reach their objectives. Barack Obama, and Donald Trump after him, relied on executive orders. But those can only go so far and are just as easily overturned by the next president.
Democrats have spread their wings to try to use existing institutions to pursue policy objectives outside their normal remit. They have found a way to pursue goals they have not been able to achieve through legislative channels. Saddling the Fed with the responsibility of solving the unemployment problem among minorities and address climate change are two examples.
Joe Biden first sought Saule Omarova as comptroller of the currency. But this position required confirmation and Republicans reacted adversely to the Cornell law professor’s nomination; she was also a graduate of Moscow State University and she opposed lending to oil companies, a “green” objective of the president and a number of members of his party. Eventually this nomination was quashed. For now, there is an “acting” comptroller.
The Fed, on the other hand, has been pliable in the face of pressure since it was created by an act of Congress and is more subject to direct congressional prodding. The Fed has been “convinced” to put climate-change provisions in its lending assessments as well as to bend its macro policy in a way progressives think will help to employ minorities by delaying interest-rate hikes. That tact is fool’s gold, as we are now seeing.
The Fed’s true job
Giving the Fed a spurious new policy mandate is not a good idea since there is no logical connection between these new mandates, Fed monetary policy, prudential risk or even credit risk except in the most extraneous way. Arguably, giving the Fed these new mandates helped to distract it from its true job and helped inflation to gain purchase and get out of control.
Whatever the reason, the Fed should not be enlisted to spearhead social policy goals. The view by progressives is that the Fed has a dual mandate and that it should seek full employment in the short run. That appears to be the new interpretation. This, in fact, is a damaging point of view. The Fed has never done that with success. Monetary policy is better focused on the long term.
The Fed’s minutes from its last meeting have just been announced and a thorough reading leads to the inescapable conclusion that the Fed is unwilling to say that it is determined to raise interest rates to reduce the inflation rate even if it results in higher unemployment. The Fed, in its minutes, instead gives credence to both objectives and pledges allegiance to both. Therefore, we’re unable to tell what happens if “push comes to shove” and the Fed must choose between them.
The starkest example of the Fed being hog-tied on this choice is simply to notice that with inflation at a 40-year high and unemployment near a 50-year low (and only briefly lower for a short time under Donald Trump), the central bank is unwilling to clearly prioritize reducing inflation.
To be sure, the minutes showed that the Fed talked of reducing inflation and expressed its determination to do so. But it also expressed its commitment to low unemployment. Of course, the Fed never explicitly says “yes, but” — yet that omission hangs in the air.
In a telling passage on participants’ views, the minutes say, without the slightest sense of urgency:
“Participants agreed that the economic outlook was highly uncertain and that policy decisions should be data dependent and focused on returning inflation to the Committee’s 2 percent goal…
Read More: Opinion: The Fed, even with its newfound hawkishness, still refuses to commit