Scrutiny of the Federal Reserve is intensifying this week in Washington, D.C., as a new congressional panel gathers to discuss whether the central bank should focus more exclusively on fighting inflation amid a broad review of the central bank.
The House's Monetary Policy, Treasury Market Resilience, and Economic Prosperity Task Force held its first hearing Tuesday. A main focus was the Fed's dual mandate of maintaining price stability and ensuring maximum employment. This mandate as written by Congress has been in place since 1978, and the Fed uses its power to set interest rates as a way of nudging both of those mandates into the proper balance.
The question of which side of that mandate is more important, though, is the topic of a long-running debate in the nation's capital. Democrats tend to favor maximum employment, while Republicans tend to emphasize the fight against inflation. The Fed enjoys broad independence in its implementation of monetary policy, but it is not unaccountable to Congress for its actions.
Task Force Chairman Frank Lucas (R-Oklahoma) stated that he intends to explore as part of the task force's work whether there really is a dual mandate for the Fed. He also plans to investigate whether the Fed should use monetary policy rules more in its decision-making process to give the public more certainty about the direction of policy.
The panel, which includes eight Republicans and six Democrats, may recommend legislation or suggestions for the Fed. Ranking Democratic member Juan Vargas (D-California) said Tuesday that "maximum employment should not be on the chopping block" as part of the discussion about the Fed's dual mandate.
When Congress charged the Fed with this dual mandate, Vargas added, it recognized that having access to a job is a signal of a healthy economy. Preventing the Fed from addressing employment would misunderstand this key way that many Americans experience the economy and would also disproportionately hurt working-class people.
Vargas emphasized the importance of preserving the independence of the Fed, stating that "the research is clear that the central banks around the world function at their best when they're allowed to operate independently." The Fed, under Chair Jerome Powell, has brought inflation down to under 3%, far below 40-year highs hit in 2022, while keeping unemployment under control. The jobless rate is currently hovering around 4%.
Federal Reserve Chair Jerome Powell testifies before the House Committee on Financial Services last month. Some Republicans have argued that the Fed was too slow to react when inflation surged during the COVID-19 pandemic, partly because its process was unsound.
The start of the House task force is the latest sign in Washington that closer scrutiny of the Fed could be in the offing. Billionaire Elon Musk suggested last month at a gathering of conservatives that he plans to audit the central bank, answering yes on stage at the Conservative Political Action Conference when asked if that's something he intends to do.
It is clear the White House does want a closer relationship with the central bank — and other independent agencies — after issuing a new executive order last month that gives Trump's appointees more power over such agencies. The new order makes clear that monetary policy — the direction of interest rates — will remain under the Fed's full control, but the Fed's oversight of the country's biggest banks will now have a closer connection to the policies and priorities of the White House.
Stephen Miran, Trump's nominee to chair the Council of Economic Advisers, has been critical of past steps taken by Fed Chair Jerome Powell to stimulate the economy during the COVID-19 pandemic. "Powell was wrong politically and economically when he urged Congress to 'go big' on fiscal stimulus in October 2020, on the eve of a Presidential election," Miran said.
Since Trump's election win, Powell has repeatedly reinforced his intention to serve out his term as chair through May 2026, telling reporters that he didn't intend to go anywhere even if Trump tried to fire or demote him. "Not permitted under the law," the central bank chair said in November when reporters asked about it.
Trump has made it clear he doesn’t intend to fire Powell and has softened his criticisms of the Fed's monetary policy decisions. There was also discussion at the task force hearing Tuesday about whether 2% is an appropriate target for inflation. The central bank is undergoing a five-year review of how it conducts monetary policy, but it has said it won’t change its inflation goal of 2%.
Rep Bill Huizenga (R-Michigan) expressed his concerns that the Fed has "even more power, more influence, and more control over our financial system…than ever before." He stated that [The Fed] does, I believe, remain shrouded in mystery to most of the American people, and frankly we're not talking about groundbreaking stuff right now.
Huizenga asked how the Fed could be more transparent to Congress and the American people in communicating its policy choices and the direction it’s taking so consumers and investors could make informed decisions. The task force's work will likely shed light on these issues as they continue their review of the Federal Reserve's policies and operations.
The Debate Over the Fed's Dual Mandate
The concept of a dual mandate for the Federal Reserve is not new, but its significance has been growing in recent years. Congress charged the Fed with maintaining price stability and ensuring maximum employment when it passed the Humphrey-Hawkins Full Employment Act in 1978.
Since then, the Fed has used its power to set interest rates as a way of nudging both of those mandates into the proper balance. However, there is ongoing debate about which side of that mandate is more important.
Democrats tend to favor maximum employment, while Republicans tend to emphasize the fight against inflation. The difference in priorities reflects fundamentally different views on the role of monetary policy and its impact on the economy.
On one hand, Democrats believe that ensuring maximum employment is essential for a healthy economy. They argue that having access to a job is a signal of economic prosperity and that preventing the Fed from addressing employment would misunderstand this key way that many Americans experience the economy.
On the other hand, Republicans believe that fighting inflation should be the top priority. They argue that high inflation can have devastating effects on the economy and that the Fed has failed to adequately address it in recent years.
The dual mandate is not just a theoretical concept; it has real-world implications for monetary policy decisions. For example, if the Fed prioritizes maximum employment over price stability, it may keep interest rates low even if inflation rises, which could have negative consequences for the economy.
Conversely, if the Fed prioritizes price stability over maximum employment, it may raise interest rates to combat inflation, but this could lead to higher unemployment and slower economic growth.
The Role of the Fed in a Changing Economy
The Federal Reserve plays a crucial role in shaping the US economy. As the nation's central bank, its primary goal is to promote maximum employment and price stability.
To achieve these goals, the Fed uses monetary policy tools such as setting interest rates and buying or selling government securities on the open market. These actions influence economic activity by affecting borrowing costs, inflation expectations, and overall financial conditions.
However, the economy has changed significantly since the 1970s when the dual mandate was first introduced. Today's economy is more complex and interconnected than ever before, with global supply chains, international trade, and technological advancements all contributing to its dynamics.
In this context, some argue that the Fed's traditional tools are insufficient for addressing modern economic challenges. They propose new approaches, such as using monetary policy rules or more actively managing interest rates, to better respond to changing economic conditions.
The Task Force's Work
The House task force is tasked with reviewing the Federal Reserve's policies and operations in light of these debates and changes. As part of its work, it will examine whether there really is a dual mandate for the Fed and how this impacts monetary policy decisions.
The panel will also investigate whether the Fed should use more formal rules or guidelines to inform its decision-making process. This would help provide clarity and certainty about the direction of policy, which could in turn promote more effective communication with Congress and the public.
Ultimately, the task force's recommendations may shape the course of monetary policy and the role of the Federal Reserve in years to come.
Conclusion
The debate over the Fed's dual mandate is complex and multifaceted. While some argue that maximum employment should be prioritized, others believe that fighting inflation should take center stage.
The House task force's work will provide valuable insights into these issues and shed light on the role of the Federal Reserve in a changing economy. As it delves deeper into the complexities of monetary policy, it is essential to consider the perspectives of all stakeholders involved, from Congress and the public to economists and policymakers.
By doing so, we can better understand how the Fed's actions impact the economy and make more informed decisions about its policies and operations in the years ahead.