The Fed’s phony mandate

How many times have we heard top Federal Reserve officials solemnly invoke the Fed’s “dual mandate” as the be-all, end-all justification for their monetary policy decisions? In virtually every public speech she gives, Chair Janet Yellen cites the Federal Reserve’s “statutory mandate to promote maximum employment and price stability” as her guiding commands. She references these same two sacrosanct directives whenever she gives testimony before congressional committees, always conveying the sense that she is duty-bound to honor them.

It’s the will of the people, after all. That’s the implication.

But the so-called dual mandate was not exactly written in stone, it turns out. Rather, it has survived as a disturbing legislative artifact from some 40 years ago — when a congressional resolution was put forward to make the Federal Reserve answerable to the White House. Sen. Hubert Humphrey (D-Minn.) was insistent that the executive branch be granted a stronger role in the execution of monetary policy. During a 1976 hearing on the Employment Act of 1946, he pushed hard to make it happen.

{mosads}With the zealousness of a central planner, Humphrey instructed the Fed to direct its efforts toward achieving economic nirvana by the numbers: Within five years, unemployment should not exceed 3 percent for people 20 years or older. Inflation was to be reduced to 3 percent or less — provided that its reduction would not interfere with the employment goal. The Humphrey-Hawkins Act, signed into law by President Carter in 1978, thus consecrated the Keynesian notion that a trade-off existed between unemployment and inflation. All of which served the scholarly conceit that government could proficiently manage the economy by manipulating the money supply.

That basic notion continues to reign today, serving the cause of discretionary monetary policy executed by a federal agency governed by seven members appointed by the president and approved by the Senate. Yet as often as Fed officials summon the “dual mandate” as a statutory responsibility, it’s curious that they conveniently neglect to mention certain other aspects of that same legislation. The Humphrey-Hawkins Act also decreed that the inflation rate should be brought down to zero by 1988; that the federal government should achieve and maintain a balanced federal budget; and that the United States should promote a “sound and stable international monetary system.”

And one more thing to remember whenever Fed officials attempt to justify their evolving monetary policy on the basis of their seemingly inviolable dual mandate: The legislative language amending the Federal Reserve Act explicitly directs the Fed to aim its efforts at achieving not two, but rather three objectives, i.e., “to promote the goals of maximum employment, stable prices, and moderate long-term interest rates.”

So it’s more appropriately described as a triple mandate. But it’s clear that no one likes to bring up the third component — especially when we have had nothing like “moderate” long-term interest rates for the last seven years.

In truth, none of these decrees are binding on the actions of Fed officials. They do provide expedient cover, though, for the increasingly nonsensical actions of our central bank’s governing board and monetary policy committee members. The Fed tries to claim that its decisions have proved consistent with achieving “maximum employment,” even though the headline number of 5 percent unemployment is belied by the fact that our nation has the lowest labor participation rate in 38 years. And it’s hard to be grateful to the Fed for stable prices when Yellen herself is constantly vexed that inflation is not considerably higher — despite her best efforts to pump up the money supply by suppressing interest rates. Meanwhile, pity the poor bank customers who have been getting next-to-nothing returns on their savings accounts; so much for the third and forgotten mandate of achieving moderate long-term interest rates.

The Federal Reserve is being revealed as not only less-than-divinely ordained, but supremely fallible in carrying out the ill-conceived tasks it was assigned so very long ago. Though Fed officials desperately cling to their presumed statutory mandate as a way to rationalize their government agency’s existence, it’s time to recognize that it stems from an era when government management of the economy was seen as a good thing — and the Fed was meant to follow orders. Central planning through central banking; what could go wrong?

But much has indeed gone wrong, embarrassingly so. The Fed was forced last month to symbolically raise interest rates by the sheer social pressure of having promised to do so before the end of the year; the decision was utterly at odds with the Fed’s own set of “metrics” for steering economic outcomes through monetary policy.

So now we can expect to hear a newly adjusted narrative from Yellen as she attempts to explain why the unprecedented exercise of monetary “stimulus” in the wake of the 2008 financial crisis — itself the result of monetary miscalibration — has given us the most lackluster economic recovery in America’s history. No longer will we hear the virtues of “forward guidance” being played up by Fed officials; it has been replaced by the false modesty of claiming to be “data-driven” when they jerk the lever of government intervention.

But you can bet we will still hear hallowed references to the statutory mandate entrusted to the governing board of the Federal Reserve. Strip the veneer off this worn-out and worthless cliche: You won’t find a commitment to sound money and free enterprise, but rather a government-knows-best mentality hiding beneath.

Shelton, an economist, is co-director of the Sound Money Project for the Atlas Network and the author of “Money Meltdown.” Follow her on Twitter @judyshel.