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Question of the Day: What is the Fed's Real Dual Mandate?

I propose a drastic rewording of the Fed's dual mandate to fit actual policy decisions it makes.
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Dual Mandate Bullseye

Should the Fed Reverse Direction?

Michael Lebowitz commented on San Francisco Fed President Mary Daly's comment "High inflation numbers, in my opinion, do not indicate that the Fed should reverse direction." 

San Francisco Fed’s Daly: Economy Doing Better Than Expected

I cannot find the precise quote listed above but I have no doubt Daly said that or something very close. 

I did find this: San Francisco Fed’s Daly Says Economy Doing Better Than Expected.

In an interview this week with The Associated Press, Mary Daly, president of the Federal Reserve Bank of San Francisco, offered up her own perspective.

“It is appropriate to consider tapering asset purchases later this year or early next year,” she said. “I really see the economy as being able to start functioning more and more on its own, which means we can withdraw a little bit of our accommodation.”

Yet she remains cautious about pulling back on the central bank’s support, noting that “we’re far from full employment,” one of the Fed’s central goals.

On Wednesday, Robert Kaplan, head of the Federal Reserve Bank of Dallas, told Bloomberg News that he favored starting to reduce those purchases “sooner rather than later.”

“If we take our foot off the accelerator gently now,” Kaplan said, “we’ll have more flexibility down the road to avoid more abrupt action or severe actions in the future.”

James Bullard, president of the St. Louis Fed, and Raphael Bostic, head of the Atlanta Fed, have expressed support for raising the Fed’s short-term rate next year — well before Fed policymakers as a whole have forecast that they will do so.

Since December, the Fed’s official stance has been that it needs to see “substantial further progress” toward its dual goals of full employment and annual inflation modestly above 2% before it would start reducing its bond buying.

Clever Shift in Wording

That's quite a clever shift in wording. 

Please consider this definition of Dual Mandate by the Richmond Fed from December 2011 article the Federal Reserve's "Dual Mandate": The Evolution of an Idea

Since 1977, the Federal Reserve has operated under a mandate from Congress to "promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates" — what is now commonly referred to as the Fed's "dual mandate." 

Evolution of an Idea

Congress never changed that mandate but somehow the mandate evolved to "full employment and annual inflation modestly above 2%"

Further Evolution

Price stability does not mean stable, but rather "annual inflation modestly above 2%."

This in turn involves an evolution in the meaning of the word "modestly". 

Modestly vs Moderately

On August 4, Fed Vice Chair Richard Clarida clarified his definition of modest, rather "moderate" in a speech on Outlooks, Outcomes, and Prospects for U.S. Monetary Policy.

  • The Fed projects "core PCE" to surge to 3 percent before falling back tp 2.1 % for the next two years.
  • "If, as projected, core PCE inflation this year does come in at, or certainly above, 3 percent, I will consider that much more than a 'moderate' overshoot of our 2 percent longer-run inflation objective
  • "As always, there are risks to any outlook, and I believe that the risks to my outlook for inflation are to the upside."

We cannot be certain what Clarida's definition of "modestly" but his definition of "moderately" does not go above 3%.

We are already there!

A "Welcome" Rise in Inflation Comes Sooner than Expected!

I discussed "moderately" on August 4 in "Welcome" Rise in Inflation Comes Sooner than Expected, Now Rate Hikes?

CS National, Top 10, CPI, OER, Rent, PCE

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CS National, Top 10, CPI, PCE 2021-06

Year-Over-Year Measures of Inflation

CPI, PCE, CSAI Percent Change 2021-06

Holy Smokes Fedman


PCE is already at 4.0% with the core at 3.5% vs Fed 2021 predictions of 3.4% and 3.0% respectively.

 Modest Observations

  • It appears the Fed moderately overshot its evolutionary goal of modest inflation. 
  • Alternatively, the Fed modestly overshot its evolutionary goal of moderate inflation.

"Inflation is Half Our Mandate" 

On August 3, Fed Chair Jerome Powell accidently stated the truth.

"Inflation is Half Our Mandate" said Powell before quickly correcting himself. 

Click on the link for additional amusing quotes.

Expect More Evolution 

Expect further groundbreaking discussion on the evolution of mandates, the words modest and moderate, and of course the untold story of the meaning of "full employment".

I propose we go straight to where we need to be. 

Dual Mandate Proposal 

  • Mandate #1: Enrich the banks, the wealthy, and the top political class at the expense of everyone else.
  • Mandate #2: Convince the American people that mandate #1 is for their own good.

Mandate #1 is a huge success already. Unfortunately, the Fed is struggling with Mandate #2.

Fed's Preferred Measure of Inflation

  1. For discussion of my observations and various measures of inflation please see Fed's Preferred Measure of Inflation is Only 4.0%, Anyone Believe That?
  2. For further discussion of the FOMC news conference, please see Fed Admits Inflation Might be Higher and More Persistent Than They Expect


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