What exactly is the Federal Reserve's "dual mandate"?
Alright, let's talk about the Federal Reserve's "Dual Mandate"—it's not as complicated as it sounds.
The Federal Reserve's "Dual Mandate": Price Stability and Maximum Employment
You can think of the Federal Reserve as the captain of the American economy's ship. Congress has given this captain two most important navigation goals, which are known as the "Dual Mandate." These two goals are:
- Promoting Maximum Employment
- Maintaining Stable Prices
Below, I'll explain in plain language what these two goals mean and why they sometimes "clash."
1. Promoting Maximum Employment: Ensuring Everyone Who Wants a Job Can Find One
- What does it mean? It doesn't mean the unemployment rate has to be zero, because there will always be people changing jobs or recent graduates looking for work. It means the Fed strives to create an economic environment where businesses are willing to create new positions, and most people looking for work can find a job relatively easily.
- How does it do this? When the economy is sluggish and unemployment is high, the Fed usually cuts interest rates. Lower interest rates mean lower costs for businesses to borrow and expand production, and lower costs for individuals to borrow for homes or cars. When people are more willing to spend, the economy becomes more active, businesses get more orders, and naturally need to hire more people. This is like "hitting the gas" on the economy.
2. Maintaining Stable Prices: Preventing Money from Losing Its Value
- What does it mean? This primarily refers to controlling inflation. If prices rise too quickly, the $100 you hold today might only be worth $90 in purchasing power tomorrow. When money loses its value, it creates widespread anxiety and causes significant harm to the economy. Conversely, prices not rising at all (deflation) is also unhealthy, as it can indicate a contracting economy.
- How does it do this? When prices are rising too quickly (high inflation), the Fed will raise interest rates. Higher interest rates make saving more attractive, while the cost of borrowing for consumption and investment increases, leading people to reduce their spending. As demand in the market cools down, the upward momentum of goods prices is naturally curbed. This is like "hitting the brakes" on the economy. The Fed generally considers an annual inflation rate of 2% to be healthy and ideal.
The Most Challenging Part: The Two Goals Often "Clash"
You see, this is where the problem lies:
- To promote employment, the Fed needs to "hit the gas" (cut interest rates) to heat up the economy.
- To maintain price stability, it needs to "hit the brakes" (raise interest rates) to cool down the economy.
These two operations are completely opposite.
It's like driving a car: you want it to go faster (promote employment), but you also worry about the engine overheating and blowing up (inflation).
- If you step on the gas too hard, the economy overheats, and prices skyrocket, failing the second goal.
- If you hit the brakes too hard, the economy stalls, businesses start laying off workers, and the first goal cannot be maintained.
Therefore, the job of the Federal Reserve Chair is essentially an "art of balancing." They need to assess various economic data (such as unemployment rates, CPI, PCE, etc.) to determine whether to press the gas more or tap the brakes gently, aiming to keep the American economy's "car" driving both quickly and steadily on the path of "maximum employment" and "price stability."
In summary, the Federal Reserve's "Dual Mandate" is an extremely challenging job: on one hand, ensuring the economic engine is robust enough so everyone who wants to work has a job; on the other hand, constantly monitoring the dashboard to prevent the engine from overheating and causing prices to spiral out of control.