One thing that mystifies me about the extraordinary leaps of statutory interpretation by Bernanke and other members of the FOMC in their insistence that their policy actions are consistent with their “dual mandate” of maximum employment and price stability is the preamble to the mandates in question. I think that the Fed actually has only a single mandate because the entire thing including the preamble is one complete sentence. If following standard rules of construction, a proper interpretation of it would be one that gives all parts of the sentence meaning.

Here it is from the Full Employment and Balanced Growth Act of 1978:

[The Federal Reserve] 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.

All of the individual goals are within the context of maintaining “long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production…” and in thinking about the condition our economy has been in, the tight money seeds of which were sown in the 2006-07 timeframe and continued on through a spectacular collapse of the financial system to the present, it seems pretty impossible that the Bernanke Fed was ever compliant with any statutory mandate at all. It is particularly so since the severe downturn during which the Fed has insisted upon artificially suppressing demand with the rigid 2% PCE ceiling so as to not allow even a recovery from natural price adjustment and market clearing over time. The economy keeps getting hit with mini-nominal shocks every time inflation expectations reach or breach the 2% ceiling thereby extending the period in which pre-recession levels of production capacity are idle and most likely lost over time.

One of the important aspects of this problem is that if we should ever get back to a level of economic activity that requires these resources to be brought back online, there is no way to predict what portion of that capacity will come back online here rather than being transplanted to emerging markets. If I understand my history correctly, that was one of the reasons behind the preamble to the Fed mandates. If we have some kind of event that results in idle resources, Congress intended for them to be reemployed as quickly as possible before they are lost to foreign competition, with a preference that these kinds of episodes not happen as much as they are possible to avoid, and expressed it in terms of full employment, price stability and moderate rates of interest.

Nothing in the expression of Congress suggests that price stability would be the Fed primary goal that is divorced completely from desired macroeconomic stability in a nominal sense. It is sad that this particular point ends up lost upon the public in the ambiance of inflation fear and mob-rule politics. We are hurting ourselves badly by allowing such terrible monetary policies that come with possibly enormous opportunity cost to posterity to continue.

[Update]
This post from Marcus Nunes has some graphs that illustrate my point… And this post as well. Both links will open in a new window.
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