CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press What Part of the Fed Fulfilling Its Mandate is "Delicate?"

What Part of the Fed Fulfilling Its Mandate is "Delicate?"

Thursday, 30 August 2012 04:39

An article reporting on the Commerce Department's release of data showing a small upward revision in second quarter GDP told readers that Federal Reserve Board Chairman Ben Bernanke faces a "delicate decision" in deciding whether to take further steps to boost the economy. While the piece notes the economy's continuing weakness, it tells readers:

"More aggressive steps to stimulate the economy will also draw criticism from Republicans, who have demanded that Mr. Bernanke forswear additional monetary moves for now."

While it might be beneficial to the Republicans to have a weak economy over the next two months, it is not Bernanke's job to help them win the election. The Federal Reserve Board is supposed to target full employment and price stability. Since there is no evidence whatsoever of significant inflationary pressures in the economy, the Fed should be focused on the full employment part of the mandate.

The Fed's charter does not say anything about not boosting the economy in a context where its actions could have an impact on the election. There can be little dispute that the economy is operating well below full employment which means that the Fed should be focused on increasing employment, even if the Republicans don't want to see more job growth before the election. (As a practical matter, the Fed's actions at its next meeting in mid-September are unlikely to have a noticeable impact on the economy by the election.)

Comments (7)Add Comment
Isn't the whole point of the FED removing politics from monetary policy?
written by Robert Salzberg, August 30, 2012 5:19
Isn't the reason the FED is set up to handle monetary policy independently of Congress and the President, minimizing politics in monetary policy?

After the president appoints the FED chair, isn't he/she supposed to just follow the mandate with as little regard to politics as possible?

The point of the fed is not removing politics
written by Tom, August 30, 2012 5:51
the point of the fed is maintaining as much control over monetary policy by bankers as possible. the story about political independence is a cover story for the anti-democratic structure of the fed.
Constant Cam-pains
written by Bart, August 30, 2012 6:27

That "Delicate" comment is especially ridiculous in light of an election never being more than just a few months distant.
Tom got it....
written by pete, August 30, 2012 12:04
When JPMorgan created the Fed by stealth in 1913, the whole idea was providing stable bank earnings so he didn't have to bail out idiot or unscrupulous bankers. It is indeed run by the banks, certainly not democratic, and that's exactly the way JP designed it. Somehow in the later half of the 20th century monetary policy began to be thought of as a great macro tool, ignoring the design of the Fed. We've had several housing booms and busts, a dotcom bubble and crash, and a doubling of the inflation rate during the dual mandate-post Bretton Woods era. Hard to call that successful...I don't think JP designed the Fed for this purpose. Activist monetary policy (with repeated failures) merely adds additional uncertainty into an already risky economy.
written by Floccina, August 30, 2012 3:23
I vote we make Scott Sumner fed chairman and at least try NGDPLT.
written by Calgacus, August 30, 2012 11:42
Pete, what you say is true, but the idea that the "unemployment" part of the dual mandate somehow led to inflation post-Bretton Woods is just weird. In the real world, post-Bretton Woods, post-70s is just when the Fed & much worse, everyone else, the Congress, the Treasury & the people decided to ignore unemployment. And "economists" decided to erect the temple of unKnowledge, the clown college, called modern mainstream economics. Having forgotten the Great Depression, full employment was abandoned worldwide, leading to the Great Stagnation called "The Great Moderation". If anything the interest rate increases (mis)targeting the anti-inflation mandate - and ignoring the unemployment mandate, were inflationary over this long run.
written by skeptonomist, August 31, 2012 1:36
Politics certainly has a potential effect on how the Fed operates. Bernanke's term is up in January 2014, so any promises he might make about inflation target, etc. are only operative for a limited time. Contrary to what you might think from reading Baker and Krugman, Bernanke has presided over by far the biggest deliberate effort to expand the money supply in history (outside of war spending), and federal funds rate is lower than ever before - and has been for 2 1/2 years. This may have prevented actual deflation and kept the recession from being worse, but on the other hand it obviously did not prevent a bad recession and the main effect of the buying programs including QE seems to have been to bloat bank reserves. All this was done over the objections of many conservative politicians and even some members of the Fed itself; if Bernanke was determined to please conservatives his actions would have been completely different.

People like Baker and Krugman who claim (correctly I think) that demand is the problem should not be wasting time and effort vilifying the Fed for doing exactly what it was supposed to do according to their philosophy.

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.


Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.