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The Federal Reserve has been reducing its balance sheet since the beginning of 2018. Photo by Flickr user ctj71081.

From Alan Greenspan to Justin Wolfers, economists consider the Fed’s ‘Dual Mandate’

Editor’s Note: The release of government unemployment data Friday will paint the first official picture of the labor market since the Federal Reserve decided to end its bond-buying program last week.

Announcing their decision last Wednesday, the Fed nodded to job gains and a lower unemployment rate since they began quantitative easing in the fall of 2008. Janet Yellen has made a point of broadening the Fed’s attention to labor market indicators other than the unemployment rate, like the labor participation rate, which has been declining as workers — only about half of whom are near retirement age — drop out of the workforce. But the Fed acknowledged right away in last week’s press release that “the underutilization of labor resources is gradually diminishing.”

The labor market, however, is only half of what the Fed had to consider when making its decision. Maintaining price stability is the central bank’s other statutory mandate. On that front, the Fed predicted that inflation would remain low “in the near term,” but that “the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.” Given prolonged expectations, though, the Fed said they expect to hold short-term interest rates near zero for the “foreseeable future.”

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The Fed’s not the only central bank weighing these type of forecasts. Just three days after the Fed ended quantitative easing, the Bank of Japan made a surprise decision to ramp up its bond buying. Right now, the concern in Japan is deflation. (In the United States, Paul Krugman argues, the Fed should be worried about deflation too — more than they are about inflation.)

But too much quantitative easing, central bank hawks fear, could lead to runaway inflation.

Sound familiar? That’s similar to the argument made by those on the right in the United States, like Columbia professor Charles Calomiris.

Unlike the Federal Reserve, however, the Bank of Japan has a single mandate limited to maintaining price stability. In America, our central bank is saddled with a dual mandate, as our resident econo-crooner Merle Hazard explained in song on our page:

Thinking about how unique the Federal Reserve Bank is, on the eve of the release of October’s unemployment data, we wanted to revisit Merle’s hit and turn to top economic thinkers, quite a few of them former Fed officials, for their reactions. Almost all of them lauded Merle’s musical mastery, but some criticized Merle’s interpretation of the “Dual Mandate” and thought his lyrics left something to be desired.

— Simone Pathe, Making Sen$e Editor


Alan Greenspan, former Fed chair: “Dual Mandate” has great chord structure and progression; the musician in me really responded. The lyrics, however, do require some modest editing.

Alan Blinder, professor at Princeton and former Fed vice chair: I love both “Dual Mandate” and the Fed’s dual mandate. Merle Hazard’s tune is musical and amusing. It’s also accurate. Yes, life is harder for central bankers with a dual mandate (for low inflation and high employment). After all, they must frequently balance one goal against the other.

But life should be easier for the population of a country whose central bank has a dual mandate — like the United States. After all, how many people care only about inflation and not at all about employment?

There’s a further point, about honesty. As Hazard’s song correctly notes, the Bank of England and the ECB, among others, have a single mandate: to keep inflation low. But if you watch what they do, as opposed to what they say, these central banks don’t behave so differently from the Fed. Their rhetoric just doesn’t match their actions. The Fed’s do. Which do you think is the better system?

Catherine Mann, OECD chief economist and former Federal Reserve Board assistant director: The doleful tones of “Dual Mandate” capture the personality of the Central Bank conductor faced with one instrument and two scores. But, unlike the rowdy fiscal audience, the harmony of the chorus supports the orchestration.

Justin Wolfers, Peterson Institute senior fellow: The struggle to balance the demands of keeping unemployment low versus keeping a lid on inflation is just the sort of dilemma crying out for the full country-music treatment. And Merle delivers a story that’s exactly right, of the battle between workers scared about losing their jobs and rentiers demanding the nominal value of their wealth remain unchanged. In the policy arena, it plays out as a battle between doves who urge a greater focus on unemployment, and hawks who are more focused on inflation.

I had always thought this struggle central to understanding modern central banking. However, right now, we’re in the unique situation where the Fed is failing on both arms of the dual mandate: unemployment is too high, and inflation too low. It’s an historic moment when hawks and doves can agree that the Fed needs to do more to stimulate the economy. Recognizing this, I hope Merle follows up with a power ballad featuring hawks and doves joining hands to urge the Fed to live up to its mandate.

Arthur Laffer, economic adviser to Ronald Reagan: Absolutely brilliant. It shows Merle at his very best from composing, directing, and performing. Oh how he has advanced since he did one of his first videos with me behind the Frist.

Richard Syron, former president of the Boston Federal Reserve: This is terrific. You should market it like mad, followed by its successor “Stand by your Fed.”

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One issue the song doesn’t address is the putative dropping of judgment by the FOMC [Federal Open Market Committee] in favor of a rule as advocated by some in the Congress. That’s best addressed by “You picked a fine time to leave me Lucille.”

Watch Paul Solman’s segment on the Federal Reserve’s “Dual Mandate” below:


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