The Fed’s dual mandate: The evolution of monetary policy and how it’s communicated

Until the mid-1990s, the practice of the Federal Open Market Committee (FOMC) was to say nothing about what it was doing to meet its congressionally mandated goals of promoting maximum employment and stable prices.

It’s a different story now. The FOMC has traded silence for greater transparency about how it interprets its goals and explains its monetary policy actions. Statements of policy decisions, press conferences, and summaries of economic projections are all now part of the policymaker toolkit.

A review of the framework the Fed uses to pursue its policy goals, due to conclude this summer, may yield further adjustments to both monetary policy strategy and how that strategy is communicated to the public. To explore how the Fed’s approach to pursuing its dual mandate goals has evolved and how the framework review might change that approach further, Conversations on Central Banking, the Cleveland Fed’s webinar series, on November 14, 2024, hosted three former senior Fed officials who helped shape earlier policy approaches.

Their panel discussion, titled The Fed’s Dual Mandate: Recent Progress and Challenges, was moderated by Reuters Fed reporter Michael Derby.

Former Board of Governors vice chair Alan Blinder and advisors Ellen Meade and Jon Faust described a series of decisions fostering greater transparency beginning in February 1994, when the FOMC started announcing changes in monetary policy after its meetings.

Until then, Blinder said, “the Fed had a very clear policy about the dual mandate, which is to say nothing and say it cryptically.”

At about the same time as the Fed began disclosing policy moves, individual policymakers, who had limited themselves primarily to talking about the stable prices part of the Fed’s mandate, increasingly included maximum employment in their discussions, according to Blinder. That broader conversation was helped along, he said, by an attention-getting August 1994 speech he gave emphasizing the importance of pursuing both parts of the mandate.

But neither inflation nor maximum employment was tethered to a numeric goal, giving Fed policymakers broad discretion in interpreting the dual mandate.

That changed in 2012 when the Fed issued the first statement on longer-run goals and monetary policy strategy, one that included an inflation goal of “2 percent as measured by the annual change in the price index for personal consumption expenditures.”

“This was a landmark document for the FOMC,” Meade said; “It provided context and background around dual mandate goals.”

In contrast, Meade noted, the FOMC had and still has avoided applying a numerical goal for maximum employment. It recognizes that inflation is “primarily determined by monetary policy . . . but maximum employment is largely determined by non-monetary factors . . . , and therefore it wouldn’t be appropriate to specify a fixed goal for employment.”

Fed officials individually do use their own estimates of maximum employment in policy considerations, and the FOMC has refined and added language to reflect changes in how it thinks about the employment goal.

One such set of adjustments found its way into the Fed’s 2020 policy framework update—designed to address chronically low inflation—with language indicating that policy decisions should be informed by “shortfalls” from maximum employment, not “deviations,” as stated in that 2012 statement, and that maximum employment should be a “broad-based and inclusive goal.”

The changes grew out of an extensive review process that included a research conference focused on policy strategy, tools and communications, discussion of review topics at five FOMC meetings beginning in July 2019, and the central bank’s Fed Listens initiative. In that effort, Fed chair Jerome Powell and other leaders met with representative groups of people nationally to hear how the economy affected them. The meetings underscored that years of interest rates at or near zero had created a demand for workers that pulled into the labor force people who could previously not find employment.

“One clear takeaway from these events was the importance of sustaining a strong job market, particularly for people from low- and moderate-income communities,” Meade said.

The 2020 framework update also contained another adjustment that reflected post-Great Recession challenges linked to subdued inflation and policy rates close to zero: If inflation ran a little under 2 percent for a time, policymakers would aim to achieve subsequent inflation rates a little above the target level for a time so that the rate of inflation averaged 2 percent over time.

Months after releasing the 2020 document, inflation surged, and critics accused the Fed of failing to respond aggressively enough to inflation out of concern that raising interest rates too quickly would harm the labor market.

Faust said he thinks the criticism is off the mark: “It's simply not the case that the FOMC foresaw the magnitude of the inflation that was coming but rejected doing something about it because it felt constrained by its framework.”  Still, he said, “I do believe that some aspects of the framework have been difficult for the public to understand” and that “there are several aspects of the framework that I believe should be clarified, strengthened, and/or better explained to the general public.”

Derby, the event moderator, noted that the opportunity for such refinements will come during the Fed’s current framework review.

Responding to questions from Derby, all three speakers said the Fed might consider adjusting language about achieving maximum employment to emphasize that it’s willing to take policy action if it sees that low unemployment is triggering inflation.

Blinder and Meade noted that even when the FOMC had largely brought inflation under control, higher prices didn’t come down, in turn angering consumers. Blinder said that may lead policymakers to put “a bit more rhetorical weight and policy weight on [the] inflation” part of the dual mandate.

For more information about inflation, visit the Cleveland Fed’s Center for Inflation Research (CfIR). 
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