History
In the 1970’s our economic stability as a country was declining with high inflation and unemployment. This was mostly caused by an economic condition called stagflation. This is when economic growth is stagnant while unemployment rates continue to rise. The reason stagflation is such an issue is because any government manipulation with policy is designed to raise inflation and not lower it. By raising inflation via government policy could ultimately contribute to the ongoing effects of stagflation.
All the economic chaos in the 70’s caused congress to take action and they decided to reform the (Federal Reserve) Original Act of 1913. In November 1977, the current mandate of the federal reserve was enacted. This current mandate or the “dual mandate” has three main goals which are maximum employment, stable prices, and moderate long-term interest rates. These goals would seem to provide long term economic stability; however, flaws do exist in this dual mandate.
Issues
This first issue (personal issue) with the dual mandate is the fact that it focuses so much on the unemployment rate when we all know the unemployment rate is a political manipulation tool. The unemployment rate numbers are astronomically off and it is because the only thing you have to do to not be “unemployed” is to be employed. The unemployment rate doesn’t take into account people losing jobs (due to recession) to take jobs they are overqualified for and are underpaid for. Not to mention that if you stop actively looking for work or give up you’re tossed out of the unemployment rate statistic pool all together. The biggest issue is that a mandate that dictates our national economic stability as a county has a variable (UR) that is flawed and can be misused to provide optimistic reports.
In 2009, following the recession, the average income for Chattanooga was $46,642 and the unemployment rate was 9.5%. Meanwhile, in 2014, the average income for Chattanooga was $44,704 and the unemployment rate sat at 6.8%. So, five years after the beginning of the recession (worst part of the recession) the unemployment rate was almost 3% lower but the average income in Chattanooga fell? How is that possible? Multiple variables are obviously in play, but I wanted to show this statistic to show unemployment rate doesn’t necessarily show the overall economic health of a city or a country. The statistics below shows how our unemployment rate system is flawed. The statistics from Chattanooga also provide support for the theory I proposed earlier about people taking jobs they are overqualified for and make less income than usual.
While the main issue is unemployment the bigger issue is how it correlates with our interest rates. While unemployment is obviously a bad thing, it is not necessarily bad for people that are not a part of the job loss statistic. This is because when unemployment rates are high interest rates are low because the FED tends to lower interest rates to stimulate spending. However, in economic panic (news of recession, bull market, etc) it is hard to stimulate spending even if middle class jobs are currently stable because you cannot predict what is going to happen in the future. Because of this most middle class economic status families are reluctant to spend.
Pros and cons of focus on inflation
A large majority of people that want to abolish the dual mandate want the objectives of the feds to solely focus on inflation. If we solely focus on inflation there are advantages and disadvantages to this plan. In a perfect world keeping prices down and unemployment low would work. However, we don’t live in a perfect world and to keep both prices low and unemployment low contradictory polies and actions must be used to make it work.
Focusing on inflation can help reduce inflation expectations. For example, if an independent central bank honors its commitment to keep inflation at 2% people will obviously have lower inflation expectations. Lower inflation expectations= usually keeping the interest rate lower because there are no surprises. If the cycle continues demand for high wages will diminish because prices stay relatively low and their salaries are in sync with inflation. Focusing on inflation can also bring overall clarity to monetary policy in general. Monetarism, in the 80’s, suggested attacking from the angle of money supply to indirectly attack inflation. However, this resulted in the realization that the link between inflation and money supply was weaker than expectations.
Focusing mainly on inflation can also cause some issues naturally caused by Cost-push inflation. Cost- push inflation can potentially cause an issue within an inflation focused economic evaluative system for a couple reasons. If something unexpected happens (oil prices rise quickly) and causes a CP inflation of 5%, to counter act this inflation you must raise interest rates which naturally leads to putting the brakes on overall growth. Another issue is forgetting completely about other variables. While inflation may be low it doesn’t necessarily mean unemployment is where it should be. Earlier I talked about the disadvantages of focusing on the unemployment rate and I still think there is major issues there, however leaving it out of the equation all together could result in major changes in the economy without warning to the inflation rate.
Analyst/economist expectations?
How likely is it for the Fed’s dual mandate to end? A majority the GOP hopes that it will. The GOP wants the Fed’s to stop prioritizing job creation over risk of rising prices. They believe that juggling the dual mandate has proven ineffective. Mike Pence, along with the rest of the Trump administration, points out that the fed has failed to make a significant dent in the unemployment rate.
So how likely is it that the Fed dual mandate is ended? It just depends. I believe with the current administration the GOP will push for ending the dual mandate, even though they will essentially push it back considering the GOP has objectives it must meet before the end of President Trump’s current term to support reelection. In regards to ending the dual mandate James Bullard, president of the Federal Reserve Bank of ST. louis, said that “It would be ok with me” (Censky.) This type of neutral answer tells me that he more than likely supports then ending of the dual mandate, and that he also doesn’t want to show unnecessary support for either political party.
Conclusion/Impact on Monetary policy
Monetary policy will be impacted on prioritizing what variables of the economy that is used in (US) monetary policy moving forward. Monetary policies first objective is to manage inflation while the secondary objective is to reduce unemployment. If the dual mandate is ended unemployment will be obsolete moving forward with monetary policy as a macro variable. Instead inflation will be the focus and the issues of stabilizing the economy all together will change.
Works cited
Engebreth. , Ben. “Chattanooga Tennessee Household Income.” Department of Numbers, www.deptofnumbers.com/income/tennessee/chattanooga/.
“1913 Federal Reserve Act.” Investopedia, 1 Oct. 2015, www.investopedia.com/terms/f/1913-federal-reserve-act.asp.
Bourk
e, Catherine. “The Federal Reserve’s Dual Mandate.” The Federal Reserve’s Dual Mandate – Federal Reserve Bank of Chicago, www.chicagofed.org/research/dual-mandate/dual-mandate.
DeSilver, Drew. “What the Unemployment Rate Does – and Doesn’t – Say about the Economy.” Pew Research Center, 7 Mar. 2017, www.pewresearch.org/fact-tank/2017/03/07/employment-vs-unemployment-different-stories-from-the-jobs-numbers/.
Editors , Fortune. “Fed Should Focus on Inflation, Not Jobs.” Fortune, 5 Apr. 2011, fortune.com/2011/04/05/fed-should-focus-on-inflation-not-jobs/.
Johnston , Matthew. “1913 Federal Reserve Act.” Investopedia, 1 Oct. 2015, www.investopedia.com/terms/f/1913-federal-reserve-act.asp.
Varias, STELIOS. “Why the Fed Should Abandon Its Dual Mandate.” The Globe and Mail, 26 Mar. 2017, www.theglobeandmail.com/report-on-business/economy/economy-lab/why-the-fed-should-abandon-its-dual-mandate/article4425062/.
Links
http://fortune.com/2011/04/05/fed-should-focus-on-inflation-not-jobs/
What the unemployment rate does – and doesn’t – say about the economy
https://www.theglobeandmail.com/report-on-business/economy/economy-lab/why-the-fed-should-abandon-its-dual-mandate/article4425062/
https://www.investopedia.com/terms/f/1913-federal-reserve-act.asp
https://www.investopedia.com/articles/investing/100715/breaking-down-federal-reserves-dual-mandate.asp
https://www.chicagofed.org/research/dual-mandate/dual-mandate