Power & Market

The Real Dual Mandate

Members of the Federal Reserve often discuss their dual mandate of promoting both maximum employment and price stability. The St. Louis Fed even provides a picture to illustrate the alleged balancing act to get the economy functioning properly:

Dual Mandate Balancing Act Infographic

According to the seesaw infographic above and the economic myth known as the Phillips Curve, there is a perpetual trade-off between (price) inflation and unemployment.

However, in the article: Phillips Curve: Read the Fine Print, I share the Fed’s data, referred to as a “cloud of points,” to show no correlation between inflation and unemployment existed in the last 50 years. The origin of the arbitrary 2% inflation target, as well as various problems with inflation data have also been explored. Notably, countless decades of Austrian economists have maintained that the Fed’s doctrine has a detrimental impact on society.

The necessity of maintaining the dual mandate simply doesn’t add up. If the Fed cannot control inflation, as it claims, and if inflation is not actually tied to employment, then either the Fed is pursuing a known falsehood or it doesn’t understand the false premise it has been assigned.

If this dual mandate is not feasible, then what, if any, is the Fed’s “real” dual mandate?

Keeping interest rates low and asset prices high sounds more achievable. They’d never officially say it, understandably so, but in this arena the Fed has excelled far better than anywhere else. Consider that since the early ‘80’s interest rates have only trended down due to the Fed’s policies. See Federal Funds Effective Rate below:

FRED DATA Chart of Federal Funds Effective Rate

Low rates come with benefits such as cheap and easily acquired debt, facilitating the growing national debt. Easy money kept rates low, boosting asset prices like stocks, bonds and real estate.

Unlike the success the central bank found in rate suppression and asset bubble creation, the Fed failed miserably at maintaining price stability of the U.S. dollar. By definition, there is nothing stable about a currency devaluing year over year with the potential of falling into oblivion. See Purchasing Power of the Consumer Dollar in U.S. City Average below (Indexed 1913 = 100):

FRED DATA Chart of Purchasing Power of the Consumer Dollar in US City Average

While inflation and unemployment matter to society, we should question just how much they mean to the Fed. A new narrative can always be spun to justify whichever inflation rate or employment number the Fed desires. Whether some inflation is good or transitory, or whether employment and inflation targets should be changed to allow the Fed to better meet its objectives, there will always be a reason to justify the Fed’s actions. Inherent in the dual mandate is a grave falsehood which few economists are willing to pinpoint in order to warn the public. Yet, a crushing interest rate on an unmanageable debt, plus a prolonged downturn in the stock market are two things the Fed, nor the people, will tolerate for long.

On last week’s Human Action Podcast, I mentioned that I would be hard pressed to believe the Fed was able to tighten into October of this year. It’s difficult to imagine a near-future where the Fed’s fund rate is over 2%, and where rates on home mortgages and US debt are at levels a few multiples higher. Then consider how poorly the stock market has performed from just the anticipation of the Fed’s tightening. To think the stock market would change its downward spiral after $350 billion is removed from the balance sheet in just a few months from now sounds more naive than optimistic.

History and a look at the world today indicates that “high” inflation eventually leading to a currency crisis is the norm, not the exception. That some years are perceived to be more ruinous to dollar purchasing power than others misses the long term trend, or inevitable conclusion of a debt based monetary system. No matter how painful inflation becomes, and regardless of what job data reads, it’s even more difficult to see a future where the Fed does nothing. In due time, they will rescue the stock market through inflating the money supply, lowering rates and letting all asset bubbles continue once again; no matter the consequence. 

Stranger things have happened, but we are all forced to place our bets. We are all stock market speculators now.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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