The Dual Mandate of the Federal Reserve

The Dual Mandate

The Federal Reserve Bank of the United States(The Fed) has been entrusted by Congress with two mandates to regulate the country’s economy. This dual mandate requires the Fed to control inflation and keep unemployment low. Since the Fed controls the Federal Funds Rate (the key interest rate it uses to influence other interest rates), it can influence when companies find it advantageous to take on debt and expand, leading to increased employment opportunities and a lower unemployment rate.

At first glance, low unemployment means more people are participating in the economy, which often drives up consumer prices, contributing to inflation. The Phillips Curve analyzes this relationship, describing it as an inverse correlation—when unemployment rises, inflation tends to decrease, and vice versa.

Visualizing the last 25 years

The Federal Reserve reacts to conditions in the economies to provide guidance and issue policies in order to pursue its dual mandate from congress.

• The first is to maintain maximum employment.

Visualizing the last 25 years

The second is to control inflation, this does not mean stop inflation but to regulate it maintain it a expected rate usually between 1 and 2 %.

• Since 2020 the urban consumer price index has increased by ~ 80 points

• From 2000- 2020 the index increased by ~ 90 points

Visualizing the last 25 years

As these conditions change the Federal Reserve makes changes to its policies and guidance.

Since 1999

• The Federal Reserve has remained committed to stabilizing inflation and maximizing employment. This commitment is evident in its policies, particularly in the periods following recessions or economic crisis like the dot com bubble, the housing crisis and recently the covid pandemic.