The Federal Reserve enacts monetary policies to stabilize prices and maximize employment in the U.S. economy. These dueling goals are known as the dual mandate.
The Fed has to strike a delicate balance to ensure low, steady prices while setting a course for an economy that encourages everyone to get a job who wants one.
But these goals may contradict each other.
“There’s an inherent conflict in trying to keep prices down,” Danielle DiMartino Booth, founder and CEO of QI Research, told CNBC. “It’s impossible to maximize employment and not ignite price pressures.”
For example, if prices are too hot, the Fed may vote to raise interest rates to influence a decrease in borrowing.
However, when rates are low then businesses are more likely to create more jobs while money is cheap to borrow, according to the International Monetary Fund.
Some economists think the central bank should consider a single target.
“Over the long run, it would be better if they were to, in my opinion, only focus really on price stability and therefore give people confidence that their purchasing power would remain intact,” Thomas Hoenig, former president of the Federal Reserve Bank of Kansas City, told CNBC.
Other experts argue that the dual mandate remains key to keeping the U.S. economy safe and stable.
“It strengthens the hand of those people at the Fed who are as worried about employment as inflation,” said David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution.
Watch this video to see how the Fed tries to strike a near-impossible balance to promote both parts of the dual mandate.
