The SF Fed has this to say about the mandate:
The Great Inflation of the 1970s was the next major U.S. economic dislocation. This problem was addressed in a 1977 amendment to the Federal Reserve Act, which provided the first explicit recognition of price stability as a national policy goal. The amended Act states that the Fed “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.” The goals of “stable prices” and “moderate long-term interest rates” are related because nominal interest rates are boosted by a premium over real rates equal to expected future inflation. Thus, “stable prices” will typically produce long-term interest rates that are “moderate.”
The Fed “shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production…”
This is the intent of congress. First, it says what its expectation is, and then how to tell if it is successful. This is the reason the Federal Reserve still has any power at all after it screwed the pooch on the Great Inflation. And of course, the Fed ignored it then. This was 1977 and the Fed wasn’t serious about complying until 1982. It is quite interesting that the amendment doesn’t say commensurate with inflation fighting credibility or commensurate with the maintenance of low inflation, anywhere. This is quite telling regarding the intent because when this law was passed, the country was in the midst of an inflationary crisis. If Congress thought that inflation was the primary evil, wouldn’t it have told the Fed to be concerned only about that? It doesn’t even say stable prices are a goal to be weighed any more heavily than the others because these all blend together at acceptable levels when the primary intent is met. It says commensurate with the economy’s long run potential to produce. If it had put any weight on the inflation boogeyman at all, it would have said so – definitely said so to be compliant with the zeitgeist. But it DID NOT.
The SF Fed doesn’t weigh in on this, but I’ll help them out just a little. It means manage these aggregates in a way that facilitates potential production and no more. It is expressed this way because any extra monetary shenanigans to goose the unemployment numbers when the economy is already at full potential results in inflation. The unemployment goes back up after a short period and all that is left is the inflation. But, and this is an important ‘but’, if the economy is not at full capacity the Fed is expected to manage the aggregates to get it that way, and stop pouring on the stimulus when we get there to avoid unnecessary inflation. That is the sum of all of the mandates, and each indicator of such, like the unemployment number, the level of interest rates and inflation, are indications of how well the Fed is living up to its mandate.
I do not know how this instruction got morphed into a dual-mandate. It really is only one mandate that has to do with keeping the economy running on all cylinders as much as possible, with three aspects to measure whether and how well the intent of congress is being met. There have never been any amendments to the law that drop the interest rate or the full employment goals. These are just individual goals as part of the sum and are flexible with reality.
All of the inflation boogeyman conjecture coming from the Fed about why we have such a god awful economic existence is just obfuscation of the fact that the Fed no longer cares what the Federal Reserve Act says. It certainly doesn’t say to shove near constant disinflationary gyrations on the economy because the Fed cares more about what it cares about instead of the law. It doesn’t say to leave the FF rate at zero for eternity, or sit there with no care that we don’t have enough AD and sticky prices is bedeviling us all with unemployment. No, these are things that have to be addressed because the law took away much of the discretion the Fed previously had and abused to the peril of us all. Now, it is doing the same thing, only with opposite circumstances and someone with the power to do something about it should do it, like yesterday.