The record starts with a fact that surprises people who watch Federal Reserve press conferences: the number two appears nowhere in the mandate. In 1977, Congress amended the Federal Reserve Act to direct the central bank to “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates”. That sentence is the mandate. The explicit 2 percent inflation target arrived in January 2012, and the phrase “dual mandate” itself did not become common until the mid-1990s, according to the Federal Reserve’s own institutional history.
The mandate’s ancestor dates to 1946. The Employment Act of that year committed the government, in the law’s words, to “conditions under which there will be afforded useful employment for those able, willing, and seeking work, and to promote maximum employment, production, and purchasing power.” The federal government had accepted, for the first time, formal responsibility for the level of employment and output. The Fed, meanwhile, had no statutory employment goal at all.
Senator Hubert Humphrey thought the 1946 law toothless, and said so on the Senate floor in 1976: “It is my judgment that that law has, from time to time, been conveniently ignored”. His fix was procedural. Humphrey proposed that the president submit annual monetary policy recommendations and that the Fed respond within fifteen days. Both provisions failed. The senator kept pushing, and the legislative record shows how the goal posts moved in the bargaining: a 1977 amendment to the Federal Reserve Act gave the central bank its three modern objectives, and the Full Employment and Balanced Growth Act, signed by President Jimmy Carter on October 27, 1978, added numbers. Unemployment among workers aged twenty and over was to be brought to 3 percent, inflation to 3 percent and then to zero by 1988, each target provided it did not interfere with the employment goal. Humphrey did not live to see the signing; he died in January 1978.
The numbers were tested almost immediately, and the tester was Paul Volcker. Pushing interest rates high enough to break inflation, the Fed chairman presided over a fall in inflation from above 13 percent in 1980 to about 3 percent in 1983, while unemployment rose from about 7 percent to above 10 percent, the highest of the postwar era. Volcker defended the sequencing in 1981 testimony: “I bring in price stability because we will not be successful, in my opinion, in pursuing a full employment policy unless we take care of the inflation side of the equation while we are doing it. I think that philosophy is actually embodied in the Humphrey-Hawkins Act itself.”
The 1990s brought stability and a quiet argument about targets. During the Great Moderation, inflation ran between 2 percent and 5 percent, mostly 3 percent to 4, and at the Federal Open Market Committee’s meeting in early 1995 the question was whether to adopt a numerical inflation objective of the kind other central banks used. Alan Blinder, then the Fed’s vice chair, was unpersuaded: “As usual, let me defend the status quo. We have a dual objective in the Federal Reserve Act now. I think it works very well. I think the case that it is broken and needs fixing is very thin.” The phrase dual mandate, the historical record shows, entered common usage around that same debate.
The explicit language arrived late. According to the economist Daniel Thornton, until September 21, 2010, the Committee’s policy directive contained no reference to employment at all; that meeting’s statement noted underlying inflation below the levels most consistent with its mandate. The following January, the Committee finally put a number on the price half: “The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate”. The employment half received no number, on the reasoning that the maximum level of employment is set largely by nonmonetary factors that shape the labor market.
Why the goals travel together is older than the target. Frederic Mishkin, in a 2007 speech cited in the historical record, gave the textbook answer: “Because long-term interest rates can remain low only in a stable macroeconomic environment, these goals are often referred to as the dual mandate; that is, the Federal Reserve seeks to promote the coequal objectives of maximum employment and price stability.” On the timeline, then, five dates built the institution that now moves markets: 1946, when Washington took responsibility for employment; 1977, when the Fed got its objectives; 1978, when Congress wrote numbers into law; 1995, when the shorthand was born; and 2012, when the Committee invented the 2 percent anchor everyone now quotes. The statute Congress actually passed asks for stable prices. The number is the Committee’s own.
Sources
- Full Employment and Balanced Growth Act of 1978 (Humphrey-Hawkins) | Federal Reserve History
- The Federal Reserve's "Dual Mandate": The Evolution of an Idea | Richmond Fed
