As we noted yesterday, the draft Democratic presidential-campaign platform again calls for what some have characterized as a third, racial-equity mandate for the Federal Reserve. The platform is actually far more rhetorical than prescriptive about what has become a controversial recommendation that, some argue, could lead to politicized monetary policy and undue favoritism. However, the Fed has long had a racial-equity mandate implicit in its overall instructions from Congress to ensure that the nation as a whole enjoys prosperity, not just ebullient financial markets. If the Fed actually lived up to its full statutory mandate, it would long have understood that employment isn’t “maximum” when millions are un- or under-employed, that price stability is meaningless if the middle class can’t make ends meet, and that interest rates – yes, there’s a mandate for them – aren’t “moderate” when they hover barely above the zero lower bound.
Specifically, the Employment Act of 1946 reinforced by changes to the Federal Reserve Act in 1977 states that, “The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” In short, the Fed has a triple mandate, not the dual one it always cites.
Why the missing mandate? In 2007, a Fed governor explained the complete disregard of this third mandate on grounds that neither maximum employment nor price stability is possible without moderate long-term interest rates. That might well have been true before 2008, but it’s painfully clear that ultra-low rates – the ones the Fed espouses that are anything but moderate – have promoted neither full employment nor price stability since 2010.
The Fed acknowledges that it’s missed the price stability mark, but it’s maintained for years that it’s at least ensured maximum employment. However, a read of the law shows that the Fed here also falls short. The Full Employment and Balanced Growth Act – more widely known as the Humphrey-Hawkins Act of 1978 – told the U.S. central bank to ensure maximum employment and went on to demand it as “genuine full employment” and “real income.” There has been precious little of either over the past ten years when the aggregate statistics in which the Fed takes such pride are broken down to hard distributional realities.
The Fed these days largely remembers the Humphrey-Hawkins Act when its chairman is forced twice a year to defend policy before a sometimes-skeptical Congress. It should remember it for another reason: even in 1978, when the U.S. was a middle-class nation, Members of Congress persuaded their colleagues to describe monetary policy’s mandate as an edict for shared prosperity. The Fed doesn’t need a new mandate; it needs to honor the ones it has.