Fed might as well have single mandate

By Frank Moraes

Matt Yglesias is very insightful about the Federal Reserve. Last year, he asked an incredibly important question, "If the unemployment and inflation rates were reversed, would the Fed do something about it?" The point is that the Federal Reserve has a dual mandate to keep both inflation and unemployment low. Yet all the Fed seems to care about is inflation. At the time he said that, inflation was 2% and unemployment was 8%. If it were the other ways around, the Fed would be working hard to cool the economy down. But they are perfectly happy with the way things were (and are).

There is some talk among conservatives that the Fed should have a single mandate: keep inflation low. The idea is that the Fed shouldn't worry about employment at all. Note that this is an idea that is designed to help the rich. Inflation hurts people who have a lot of money. Unemployment hurts people who have to work for a living. By saying that the Fed should only worry about inflation, the conservatives are telling us everything we need to know about them: they are policy hacks for the rich.

But today, Minnesota Senator Amy Klobuchar asked the Federal Reserve Chairman Ben Bernanke how the Fed would act differently if it did have the single mandate. Yglesias rightly noted that after much bobbing and weaving, the Fed chair said that he wouldn't do anything differently. And that's important, if not surprising. We have long known that the Fed didn't seem to think that 8% unemployment was anything to worry about. After all, none of the members of the Fed even know anyone who is out of a job.

Even Bernanke notes that he currently thinks that inflation is too low. Well, his primary tool regarding raising inflation is gone: he can't lower interest rates anymore. So the only way to raise interest rates is to convince the finance community that inflation is coming. And the only way to do that is to convince them that the economy is improving. So if Bernanke wants to bring inflation up, he should work on bringing unemployment down. But he's not very interested in that subject.

I suspect that he thinks that the power elite (the only people who matter) will never attack him for keeping inflation too low. But I'm not sure that's true. In the next 20 years (while Bernanke is still alive), important people may well look back and say, "That guy just allowed the crisis to go on and on, ruining the lives of millions of people. All because he was afraid of angering the bankers. What an awful person and central banker." Regardless, I doubt it is as simple as he thinks. And future generations will look back at him as a failed Fed chair. Sometimes caution is a bad thing. We don't want cautious fire fighters. We don't want cautious central bankers in the wake of a terrible financial crisis.

(Cross-posted at Frankly Curious.)