Comment by frontfor
12 days ago
The Fed has two mandates: maximum employment & stable prices. If prices go up, the Fed is mandated to raise interest rate.
12 days ago
The Fed has two mandates: maximum employment & stable prices. If prices go up, the Fed is mandated to raise interest rate.
> The Fed has two mandates: maximum employment & stable prices.
It actually has three listed in the Federal Reserve Act:
* Maximum employment
* Stable prices
* Moderate long-term interest rates
It's popularly called a “dual mandate” because it is perceived that properly balancing the first two will naturally also achieve the third.
> If prices go up, the Fed is mandated to raise interest rate.
No, it isn't, especially if employment is already below the “full employment” level and expected to drop even without the rate hike. Demand-pull inflation in periods of strong employment and economic growth or looming deflation in periods of weak enoloyment and economic growth are easy-mode monetary policy choices (at least as to direction, magnitude may be tricky).
But tariff-induced cost-push inflation in weak growth slowing employment conditions, where Congress and the President decline to remove the non-monetary policy root cause, that’s hard-mode monetary policy, because the usual tools to address either the employment or price problem will make the other worse.
They're mandated to raise interest rates in the event of structural inflation, not in the event of a one-time increase in prices. It would be silly if the government increasing the VAT required the fed to increase interest rates.
Even if the tariffs work as desired, they result in persistently higher prices. Unless you're expecting American laborers to work for less than literal Chinese robots, I guess.
Right, I’m just saying that raising interest rates in response to that doesn’t make any sense. It would be functionally equivalent to raising interest rates as a response to an increase in the income tax rate in order to restore the buying power of your pre-tax-increase income.
2 replies →
That's an odd, fundamentally disconnected mechanism that, I think, would have devastating impacts for Main St.
and it does, and has for many decades. This dual mandate makes little sense in practice
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The first sentence is right. The second is wrong, as implied by the first. If raising interest rates would exacerbate a recession and thereby unemployment, the fed will not do it just because prices are rising. You are ignoring half of their mandate.
The Fed has a mandate to keep inflation under control but a lot of leeway to decide if they should increase interest rates or not. If they see a price increase as temporary or structural, and not based on an interest-rate-responsive process, they will not increase rates. Some prices are "sticky", some are definitely not.