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Subcommittee Hearing Finds Fed's 'Dual Mandate' Unusual, Sows Uncertainty

Washington, November 13, 2013 - The United States and Canada are the only two advanced economies whose central banks have “dual mandates” of price stability equally weighted with another macroeconomic objective, members of the Financial Services Subcommittee on Monetary Policy and Trade learned today.

By law, the Federal Reserve is directed to both maximize employment and minimize inflation – commonly called its “dual mandate” – which has often led to confusion as to whether the Fed is paying more attention to price stability or labor market conditions at any given time.

At a hearing today comparing international central banking models, the subcommittee heard from witnesses that a more precise policy mandate, safeguarded by independence from the executive, bolsters a central bank’s credibility and improves economic outcomes.

Professor Athanasios Orphanides with the Sloan School of Management at MIT quoted former Federal Reserve Chairman Paul Volcker as saying that the Fed “will inevitably fall short” if it is “asked to do too much.”

Subcommittee Vice Chairman Bill Huizenga (R-MI) noted that central banks in other countries “work under a more focused or prioritized mandate or set of mandates.”

“Some like myself believe that the employment component at a minimum has diverted the Fed’s attention from the more important issue of low inflation which, in my opinion, should be the sole focus,” said Huizenga. “In the worst case, an equal price stability and employment mandate has the potential for moral hazard, with the Fed playing off its regulatory role against its monetary role.”

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