The Federal Reserve’s mandate is clear – ensuring the maximum level of employment while at the same time ensuring price stability.
Over time the Fed’s interpretation of this mandate has changed, but we can maybe get a bit closer by saying that the Fed has an ordering of the dual mandate.
First the Fed wants to insure that inflation (inflation expectations) over time is close to 2%.
Second, once this is the case the Fed will try to “push” economic activity in the “right” direction – meaning that the Fed will ease (tighten) monetary conditions if US unemployment is above (below) the structural level of unemployment (NAIRU).
This of course also is what is reflected in for example the traditional Taylor rule, where the Fed ‘sets’ its policy rate – the Fed Funds rate – toRead More »