The Fed’s Mandates and the Coming Scenario

Tuesday, October 23, 2012
By Paul Martin

By Bruce Johnson
October 23, 2012

“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.”
Often referred to as the “Dual Mandate” of the Federal Reserve, remarkably I count three mandates in that mission statement.

Regarding stable prices, Federal Reserve Chairman Bernanke has said on multiple occasions that he seeks 2% (or more) core inflation. In 2011, the Consumer Price Index rose over 3%. At a 3% annual, and compounded, prices in the United State will double every 24 years. This seems like a failure of attempting to achieve price stability. Even at 2%, the alleged target, prices double every 36 years. The question is, why this is not considered a failure by the Federal Reserve, rather than an unquestioned though dubious goal?

Regarding moderate long-term interest rates, we must realize that the term “moderate” is a relative term referring to historical measures. Record-low long-term rates are by no measure “moderate.” Again, why is this not seen as a failure of the Fed to follow its mandate?

Monetary policy has demonstrated, over four years, that the cost of money cannot revive a manufacturing base that has left the country. Sadly, the Fed will push on the string for three more years if Bernanke has his way. The sharp collapse of the velocity of money as shown by this chart from the St. Louis Federal Reserve demonstrates that the Federal Reserve is meeting unintended consequences of its applied theories. Sometimes theories and mandates must be revisited.

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