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The Fed Defends Its Dual Mandate

Updated on August 28, 2012

The Case for the Dual Mandate

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The Fed is under attack

The Federal Reserve is under attack from the lawmakers. Faith in the Fed was lost, during Alan Greenspan's term as Chairman. Excessively loose monetary policy, followed by aggressive remedial action had become the stock in trade of the Fed; until Ben Bernanke arrived. Bernanke had arrived at a crisis point, at which erratic policy was being identified by policy makers as having a long-term destabilizing impact on the industrial sector of the economy. Monetary policy appeared to be run for the financial sector, rather than the economy in general. This suspicion was heightened when the Federal Government bailout of the banks was monetized by the Fed.

So worried has Congress become, that the Fed is now being audited; and undergoing oversight of the appointment of its Governors.Republican VP nominee Paul Ryan even talks about giving the Fed a single Inflation Mandate; if the Republicans win the Presidential Election of 2012. In response, the Fed has increased its transparency and enhanced its communications.

It is through this channel of transparency that the Fed hopes to make the case for its continued independence; and its Dual Mandate. Recently, the Fed published a paper on the subject of unemployment. This paper concluded that unemployment is about one-third structurally driven and two-thirds demand driven in America. The implication therefore; is that since the Fed can influence aggregate demand with monetary policy, that it should remain the custodian of the Employment Mandate.

By further implication, since unemployment is still very high, the Fed can also be expected to continue with its unconventional policy tools; that allegedly stimulate aggregate demand.

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