Guest Post: The Question Isn’t Whether the Fed Should Be Stripped of Its Mandate to Maximize Employment … The Question Is Whether the Fed Has Too Much Power

Washington’s Blog

The Fed says that unemployment will remain high for years.

Some Republican congressmen are trying to take away the goal of ensuring full employment from the Fed. See this and this.

Conservatives argue that the relationship between inflation and unemployment – as represented in the Phillips Curve – is false, and therefore the rationale behind the dual mandate makes no sense. See this, this and this.

Liberals like economist James, Galbraith, congressmen Jerry Nadler and Alan Grayson and Senator Bernie Sanders are defending the Fed’s mandate to maximize employment.

But I think that all of their arguments pro or anti the Fed’s dual mandate are missing the point.

Specifically, the Fed’s dual mandate was created more than 30 years ago, in 1978.

The Fed has had this full employment mandate all throughout this economic crisis. But it is indisputable that the Fed’s actions have been increasing unemployment. See this and this. Indeed, John Williams puts the current real unemployment rate at around 23%.

The Fed had the mandate in 2007, 2008, 2009 and 2010 … but it acted to save the big banks instead of the American worker.

And yet the Fed has been given more and more power – even though it has been increasing unemployment … and even though the American people already thought the Fed had too much power. See this, this and this.

So the problem isn’t the Fed’s dual mandate … the problem is that the Fed has too much power. And the Fed has wielded that power to save its shareholders (the big banks), at the expense of Main Street and the real economy.

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About George Washington

George Washington is the head writer at Washington’s Blog. A busy professional and former adjunct professor, George’s insatiable curiousity causes him to write on a wide variety of topics, including economics, finance, the environment and politics. For further details, ask Keith Alexander…


    1. Cedric Regula

      You could call it too much power, but why not just admit that the Fed has idea how to increase employment, except perhaps in China.

      Liberals shoot themselves in the foot clinging to the Phillips curve or full employment manta. Then wait until we get stagflation, foodflation, medflation, gasflation and import inflation some day.

      Meanwhile, how goes the currency wars and offshoring, er, I mean exports?

  1. Tao Jonesing

    “So the problem isn’t the Fed’s dual mandate … the problem is that the Fed has too much power. And the Fed has wielded that power to save its shareholders (the big banks), at the expense of Main Street and the real economy.”

    Well said, but let’s put it another way.

    The Fed is an unaccountable body that has never truly adhered to its “dual mandate,” and there’s never been anybody who could make them adhere to it.

    FYI – the dual mandate went into effect in 1975 pursuant to House Resolution 133, which was urged by Chicago School monetarists like Milton Friedman. This ultimately enabled Paul Volker, under cover of the “dual mandate” (the price stability side) to kill American manufacturing by raising interest rates to the stratosphere in a supposed effort to bring “price stability” in an age of “stagflation.”

    Anybody who believes that we’re witnessing stagflation today needs to go back and question the monetarist assumptions that led to Volker’s ill-conceived plan (as much as Volker is credited with slaying the inflation monster, his efforts didn’t actually pay off until he caused he deep recession; Chicago School monetarism was abandoned as a failure, as was Volker). Those assumptions include the notion that inflation is a purely monetary phenomenon (i.e., purely a result of the amount of base money, M0, available in an economy). If you believe we are witnessing inflation due to increasing prices, you need to ask yourself how that is possible when M0 declined by 5% since the beginning of the year.

    The point is this: if you accept what GW is saying in this post, you need to go back and check your understanding of history and its most popular narratives. Volker was not a hero but a villain. Financial speculators caused stagflation (“screwflation” really, by speculating in consumer nondiscretionary commodities to reallocate aggregate demand in a manner that caused unemployment in consumer discretionary industries.)

    This is just a game to them.

    1. Cedric Regula

      I actually started my working career in the late 70s, so I have a different idea how that went. We were having a wage-price spiral type of inflation and we also had “inflation psychology” to use the term of the day for inflation expectations. The number one priority of business was to raise prices as fast or faster than input costs.

      Volker used interest rates to force the recession, and I believe he knew full well what he was doing. Surprise, surprise, AG demand fell, biz investment stopped (causing my first career change) and next thing you know wage demands and material price increases abated.

      Along with that we had silver, gold, copper and CA housing bubbles popped.

      It’s the only CB tool Volker had and he used it.

      We won’t get a replay of this type of inflation because the structure of the US economy is very different today.

      We will need a new word for it I think. Maybe stagdeinflationbubblespopedandbubblesgrowing or something like that.

    2. jest

      Tao –

      Are you saying that the amount of financial speculation (screwflation) is only a minor impact on prices now? I think this is going to be huge problem in the future, particularly if the fed succeeds in getting the economy moving. Ironically, a better economy may make things worse.

      I’m actually pretty sympathetic to your views, even the shenanigans of Volcker. The 70’s episode is frequently seen as the exception that proves the rule.

    3. Jim the Skeptic

      Unfortunately comparing the 1974-1986 economy to any other time is just about impossible because of the problems caused by the increase in the price of oil after 1973.

      From 1946 to 1973 the average price of a barrel of oil was between $17.92 and $23.13. Then came the oil embargo and the oil cartel. This table show the effects for 13 years.
      Average price per barrel of oil in USA
      Year Nominal Inflation Adjusted
      1973 $4.75 $23.13
      1974 $9.35 $41.27
      1975 $12.21 $49.42
      1976 $13.10 $50.19
      1977 $14.40 $51.76
      1978 $14.95 $49.99
      1979 $25.10 $74.67
      1980 $37.42 $99.11
      1981 $35.75 $85.82
      1982 $31.83 $71.95
      1983 $29.08 $63.66
      1984 $28.75 $60.34
      1985 $26.92 $54.54
      Oil Prices from:

      From 1946 to 1973 the CPI rose from 21.5 to 46.6 and by 1986 it was 109.6. So it rose by a factor of 2.17 over 28 years then 2.35 over the next 12 years.

      The price of oil gets factored into just about everything. Labor still had some bargaining power so wages went up as prices went up. The ‘powers that be’ tried everything to get inflation under control. Remember Gerald Ford’s “Whip Inflation Now” (WIN) campaign. Volker solved that problem, like it or not.

      I was 5 years into my working career in 1974 and I remember the problems caused by inflation. In 1979 my home mortgage rate was 10.5% instead of my brothers 7.5% in 1975. The price of gas went higher and higher. Look at the oil prices in 1979, 1980, 1981, and 1982. Want place blame for inflation then, well there it is!

  2. Edwardo

    This is all a nonsense since The Fed clearly only acts to provide liquidity for the largest member, i.e. money center, banks. Formally stripping away “The Mandate” does nothing more than recognize the actual functioning of The Fed. In the meantime, Bernanke has lied to Congress with respect to monetization, but, since Congress is by turns corrupt, clueless, and/or feckless, they do nothing about being bald faced lied to by the bald Fed head.

    I would like to believe that Ron Paul will achieve something truly monumental where The Fed is concerned, but, despite his new position, I have far more doubts than confidence in his ability to enforce transparency, let alone shut down The creature from Jekyll Island.

  3. killben

    Spot on!

    All actions are aimed at saving TBTF banks. Sanguine about high unemployment .. were they so sanguine when it was banks time of stress, no they provided money (as much as you want), pilfered from savers, tax-payers and retirees, they removed accounting requirements etc. basically did all needed to and more but when it is about high unemployment it is only actions …

    Fed has too much power, cares about TBTF banks, will screw savers, tax-payers and retirees to save banks … so do you really need them, after they never saw the crisis and ably abetted scamsters in creating them … are in the process of creating another .. DO YOU NEED THEM– ponder, ponder..?

  4. Jojo

    So how does anyone stop the Fed? Does anyone really believe that Congress has the cojones to do the job? I doubt it.

    1. Cedric Regula

      Congress likes pressuring the Fed to increase employment, especially in hearings televised on CSPAN. So one more reason to put that job out of the Fed’s responsibility.

  5. gf

    The Question Isn’t Whether the Fed Should Be Stripped of Its Mandate to Maximize Employment

    Wrong the FED most definitely needs to lose the employment mandate. The Ben Bernak even says so himself. He openly stated fiscal help is needed for employment to recover.

    Let us make it official so that Congress can no longer hide behind the FED. If they can not create jobs kick them out. Period.

  6. jest

    Can someone please explain to me how giving free money to a bank necessitates job creation for a mechanic, a pilot, a farmer, etc.?

    This whole notion that the fed can create “jobs” is just as spurious as the myth that tax cuts create jobs. It makes absolutely no sense.

    They create debt; they create modern day indentured servants; and they can pull demand forward, but I have yet to see a credible rationale for a bank creating net new jobs (outside of the FIRE sector) from nothing.

    So yes, I’m with you George, but I think this power is an illusion. Central bankers are contemporary alchemists should be dealt with accordingly.

  7. Paul Tioxon

    Once again, the masters of the obvious have spoken. I would like to draw everyone’s attention to analysis around the word ‘power’, too much of it. There are two systems of the social order that are confronting one another at the intersection of the set of all of the organizations that have national sovereignty and all of the organizations that have property rights. The nation state system is represented by the G20, or 80% if the global economic activity as valued in de facto reserve currency of the USD. The world capitalist system which has just absorbed all of the rest of the world that used to be part of the Soviet system and its allies, China, and is represented by central banks. Here is what I see is the issue, a problem for many, but more of an issue. It is a new social order. National sovereignty in the form of the military, supported by economic and technological prowess is being captured by the world economic system of capitalism. The mobility of capital and its accumulated concentration has produced political power that exceeds that of the nation state in almost every regard, but the military. However,is as asymmetrically opposed to counter moves as the pentagon is to Al-Queda. NATIONS DO NOT WANT TO BLOW UP THEIR FACTORIES AND OFFICES. But corporations are ready to take over and shrink the nation state vis a vis governmental power, scope, and over all mission.

    Transnational corporations operate outside of the limitations of national sovereignty or loyalties. But their power is as forceful within the nations they operate as the laws that are written in their favor allow. The Fed has power not because of antiquated conceptions from 1978 that could not foresee consequences, but rather, the facts of the social order and the scale of the social order has changed. The scale, the increasing amounts of people and dollar amounts of the economic activity as well as the financial manipulations of investment banking to create capital in a world wide system of a size that could not have politically been possible during the Cold War/Soviet era.

    The Fed, in addition to operating financial functions of the banking system domestically and trade and currency functions internationally, is operating as the global and unilateral decision command and control center for capital in all of its forms. If the USD is the World Reserve Currency, and it would have to be or else China, Japan, Germany etc would be getting paid in gold, then our opening up our markets is a deliberate policy with a handful of obvious primary consequences. The number one is that our trading partners hold dollars and the Fed can then exercise control over their economy to a greater degree than otherwise would be expected, in proportion to how many dollars they hold.

    The cybernetic function of money in the capitalist system is complex, but it is not rocket science. The Fed has too much power because the Capitalists won the cold war, the capitalists use the dollar as the world reserve currency, and the Fed controls the dollar. Nothing much about the congress, the constitution, the white house or the supreme court will change the structure of this emerged social order. Unless of course, I am missing something about the world in 2010 in this brief analysis.

  8. Procopius

    I’d be more amenable to persuasion if you had used Google to find out that the dual mandate actually goes back to the Employment Act of 1945.

  9. AlleyGator

    In August 2007, the Fed needed all of the power they had. What are you mad at the fed for? The lowest inflation in US history, the lowest interest rates in US country, or the fact that they didn’t also reduce unemployment in the same way that Japan didn’t either?

    Congress didn’t restore unemployment, the Senate didn’t, neither did the President either. Yves, you really need to find better guest posters.

    This anti-government rhetoric is nothing but nihilism. Really Bad Things happen to countries without a central bank.

    1. Skippy

      Things happen to countries without a central bank.

      Skippy…yes the threat is explicit…is it not. BTW it is strange the way some bandy the term nihilism around…sort of like communism or atheist or not like us, for that matter anti-government too…its just so un-american to think for ones self…eh…the great american pioneers lament.

      PS. banks should not determine the direction of a sovereign nation, that is a function of the will of the people and their duly elected representatives. All things are bequeathed permission as of it, not the other way around.

    2. Doug Terpstra

      Gator: nice handle for a cold-blooded predator lurking in dark swamps.

      You’ve called GW’s question, whether the Fed has too much power and raised a more essential one. Indeed, that is the question, to be or not to be—whether the so-called “Federal” Reserve Bank should even exist at all. Period.

      Ah, but Anonymous Jones nails it—yours is an obvious false dichotomy. You equate a central bank with the hideous “creature from Jekyll Island”. Your choice is either nothing or a violent, unaccountable criminal cartel dictating global economic policy. So you say we have either anarchy or we’re stuck with a secretive counterfeiting ring of self-serving moneychangers with no regard for the welfare of society or national sovereignty.

      Sorry, Gator, the salient question is not whether a country should have a central bank, but whether it should be governed by criminals rather than by a democratic society. Once more people get beyond the terror of not having our money controlled by crony, parasitic “capitalists” like Greenspan or Bernanke, well then the fate of the “Fed” is a no-brainer. Bring on the guillotine! Decapitate it, dismember it, burn it, and bury the ashes in a very deep pit.

      Thanks for clarifying Washington’s post. People will soon come to understand that a country can have a NATIONAL central bank under democratic control that works to create wealth for the benefit of a larger society. Then the Fed will be history.

      Happy Thanksgiving to all—and better thanksgivings to come!

  10. rc whalen

    All central banks are statist, anti-democratic entities a la Mussolini and Hitler, so the issue of power is moot. The question is who has control over the power? Or perhaps we speak of “kinder masters” a la TR, my favorite president. See my “I am Superman” paper published for Indiana State University:

  11. jake chase

    It all comes down to power. The Fed is now our unelected government. Those who believe in elections think checking Fed power will improve matters. Perhaps they can explain Obama and Bush? The truth is that we have outsmarted ourselves in permitting the unchecked growth of monopoly capital which now controls both the elected and the unelected governments. As for inflation, the numbers are entirely bogus as any supermarket shopper knows. Thanks to indexing we now have no inflation despite the fact that everything people actually need to buy increases in price month by month by month.

    Like it or not, the only solutions to all this idiocy will remain individual solutions. Revolutions don’t work either, at least not for the people doing the revolting.

  12. Jim the Skeptic

    High priests have always held too much power, primarily because human beings can not accept uncertainty.

    The best high priests established calendars to regulate planting dates. But they did not have control of all the variables and failure was bound to happen. So they came up with the idea that the gods were displeased with some human being’s behavior. Sacrificing virgins could be used to appease the gods.

    We really have not progressed much beyond that stage when we deal with our economy.

    The Fed raises or lowers interest rates which may or may not boost the economy depending on the original source of the problem. They sacrifice ‘savers’ to appease the gods of finance.

    The Republicans worship at the altar of ‘tax cuts’ to stimulate the economy which may or may not work depending on the original problems and the secondary effects of their tax cut. (Blowing big holes in the budget!) They sacrifice the poorest members of the community to appease the business gods. They tend to blame the Fed for pissing off the business gods.

    The academics have developed various gods to explain the economic world. Failure in the economy is blamed on the ruler’s failure to adhere to the only true god. They sacrifice the truth on some regular basis.

    It seems that the more formal economics education that one has, the more rigid one’s views on the economy.

    1. jake chase

      Henry George had the only solution. Read Progress and Poverty (1879). They couldn’t answer him so they conspired to ignore him. In 1964 one could get an economics degree with honors from a prestige college without once hearing his name mentioned. Veblen also had some sensible ideas, but he was difficult to follow and allowed himself to be debunked and kicked around for being a “womanizer”.

      Modern economics is complete bunk. Its purpose is to defang political discussion in the name of expertise. Its effect is to manufacture limitless corporate money while impoverishing savers and imposing debt slavery on workers.

      1. Doug Terpstra

        Speaking of things which must never be mentioned, the World Socialist Web Site has a Thanksgiving Day essay that should be burned without reading:

        “US corporations shatter profit records”

        “The American corporate and financial aristocracy is celebrating a unprecedented wealth, even as the social crisis facing the vast majority of the population deepens.”

        “US corporations took in $1.659 trillion in the third quarter, breaking records going back 60 years, according to a Commerce Department report released Tuesday. It was the seventh consecutive quarter of profit growth at “some of the fastest rates in history” according to the New York Times.”

        “If any more proof were needed, the third quarter profit record exposes the lie promoted by Democrats and Republicans alike that only the “free market” and private businesses can reverse the nation’s 9.6 percent unemployment rate. The corporations and banks are sitting on a cash horde in the trillions of dollars. This money is not being used to hire workers, but to line the pockets of the executives and top shareholders…”

        Thank you, oh thank you, BB, Happy Thanksgiving and Happy, Happy Hanakuh!

      2. LVTfan

        If you’ve not read P&P during your adult years, I encourage you to check it out now. It is available in a modern abridgment at and also, with a related online course, at

        It explains a lot of things which otherwise have no reasonable explanations.

        Hardcopy is available from Amazon or from More information about Henry George, including some speeches and essays, at

        1. ZeroInMyOnes

          Thank you (all ) for an instructive blog and comments.

          Just a heads up…the link to the Henry George modern abridgment does not seem to be active….

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