This year, Federal Reserve Chairman Jerome Powell has consistently emphasized the concept of the dual mandate in his speeches. Members of the Federal Open Market Committee (FOMC) have even dedicated entire addresses to this topic. However, a crucial point has emerged: the Fed may actually operate under a triple mandate. This was highlighted by Stephen Miran, a Trump appointee to the FOMC, during his recent confirmation hearing with the Senate Banking Committee.
Miran referenced the Federal Reserve Act of the 1970s, which charged the Fed with pursuing not only price stability and maximum employment but also moderate long-term interest rates. This often-overlooked third task sparked a variety of reactions among economists and Wall Street analysts. Some admitted they had completely forgotten about this long-term interest rate rule, while others suggested that its significance is implied by the Fed's commitment to price stability and employment.
Interestingly, some experts argue that the Fed deliberately keeps this third aspect on the back burner, primarily because the definition of moderate long-term rates is subjective. Does it pertain to 10-year Treasury yields, 30-year bonds, or is it a broader indicator of financial stability? Despite the ambiguity, experts warn against ignoring this third element, as doing so could jeopardize both the central bank and the U.S. budget.
Amid growing scrutiny of the Fed's credibility, critics argue that by not addressing moderate long-term rates, the Fed is shirking its responsibilities. However, Powell recently addressed this topic in a press conference, stating, “We always think of it as the dual mandate—maximum employment and price stability—because we believe that moderate, long-term interest rates are outcomes of stable inflation and maximum employment.”
Powell clarified that the Fed doesn't view the long-term interest rate as a separate mandate that requires independent action. Economists concur, noting that the Fed has limited control over long-term rates, as its primary tool is the short-term base rate. Historically, the impact of the short-term rate on long-term interest levels has varied, complicating the debate.
Economists like Dr. Steve Kamin, a senior fellow at the American Enterprise Institute, argue that the third aspect of the mandate is merely a “vestigial remnant” of the congressional legislation from decades past. Similarly, Joe Brusuelas, chief economist at RSM U.S., maintains that this stipulation was effectively met years ago when the Fed began targeting the federal funds rate, rendering the long-term mandate nearly obsolete.
Brusuelas explained, “The utilization of the federal funds rate at the front end of the curve profoundly influences financial conditions,” thus fulfilling all three parts of the mandate. Professor Kent Smetters from the Wharton Business School supports this view, acknowledging the significance of long-term rates for economic decisions, particularly in sectors like real estate.
Smetters also pointed out that government debt plays a crucial role in influencing long-term rates. He emphasized that maintaining control over this aspect would require the Fed to “finger-wag” Congress regarding spending, which poses a challenge given the Fed's focus on preserving its independence. This concern is compounded by the fear that Congress altering the mandate could suggest political interference in the central bank's operations.
Across the board, experts agree that the third element of the Fed's mandate should not be disregarded. Smetters cautions that if the Fed were to abandon its long-term policy task, markets might interpret it as a signal that the U.S. is neglecting its national debt obligations. This could lead to a decline in investor confidence in U.S. bonds, making them a riskier investment.
Furthermore, Elyse Ausenbaugh, Head of Investment Strategy at J.P. Morgan Wealth Management, voiced her agreement, stating, “I’m not sure that we are at a place where we need to move to change the Fed’s mandate.” She added that any changes could exacerbate perceptions of political influence over the Fed's operations.
Despite the criticisms, experts generally believe that the Federal Reserve has successfully managed all three aspects of its mandate. While Powell may not explicitly mention the long-term interest rate in every press conference, Ausenbaugh feels that the Fed remains aware of its responsibilities. She remarked, “It is not rare for Powell to field questions around the fiscal trajectory of the United States, and I think the measured way with which he addresses those questions signals that they’re mindful of the elements they can control.”
In conclusion, while the Fed's focus may seem to lean towards the dual mandate, the third element remains vital. Experts agree that any attempts to alter this mandate could potentially destabilize the bond market and undermine investor confidence. As Dr. Kamin aptly put it, “This thing isn’t broke, and any attempts by Congress to meddle with it would probably make it worse, not better.”
