The question of the Fed’s mandate is back on the table. Chairman Bernanke has been asked to address the question in his upcoming monetary policy report to the Congress. More specifically, in what can only be called a strange quirk of timing, the question is whether the country would be better off if the Fed had a single mandate of fighting inflation, as does the European Central Bank and the Bank of England.
I recall Mr. Bernanke’s arrival on the Board of Governors and member of the FOMC as “Governor” Bernanke in 2002. He was known to have an agenda of inflation targeting, but he was patient in pursuing his goal and Chairman Greenspan was cool to the idea so it didn’t happen.
For a brief history of the Fed’s mandate over the years, see my “Brief Analysis” article for the National Center for Policy Analysis.
While a single inflation mandate may not be a bad idea, this is hardly the time to formally withdraw from the battle against high unemployment. Both the ECB and the Bank of England have essentially had to ignore their single mandates during the past crisis, recession, and slow recovery.
The morning papers say that Mr. Trichet, President of the ECB, is poised to raise the policy rate later this week for the second time in the present cycle, but the European economy has slowed since his first tightening move, making the timing more awkward. I’m afraid the U.S. employment report later this week will once again highlight an economy hardly in a position to take a similar tightening move.
During my tenure on the FOMC—February 1991 to November 2004—the mandate question went from concern over apparently incompatible goals to a reconcilement based on the idea that in the long run the best environment for growth is a stable price level. I expect that’s where the balance will remain without formal changes necessary.