The Federal Reserve's Dual Mandate

In 1977, Congress passed a law requiring the Federal Reserve to promote both maximum employment and price stability. This is often called the "dual mandate" and guides the Fed's decision-making in conducting national monetary policy.

The charts below plot the current rates of unemployment and inflation and the most recent projections for the future. The dots show the mid-points of the central tendency of the forecasts for the next three years and the long-run projections, while the dashed lines give the upper and lower ranges of the long-run projections.

The Federal Open Market Committee (FOMC) establishes the aim of monetary policy in achieving the Federal Reserve’s dual mandate. The Committee’s policy decisions are often specified in terms of a target for the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances held at the Federal Reserve to other depository institutions overnight. This short-term interest rate serves as a benchmark for market rates of interest paid by consumers and businesses. By adjusting this rate, the Federal Reserve can promote financial conditions supportive of its dual mandate.

Open market operations--purchases and sales of U.S. Treasury and federal agency securities held by the Federal Reserve--are the principal tool for implementing monetary policy. Typically, these operations are conducted in such a way as to hold constant the overall size of the Federal Reserve’s balance sheet. However, during and after the recent financial crisis the FOMC took steps to expand the Fed’s holdings of securities to provide additional liquidity to financial markets and improve financial conditions. Much of the subsequent increase in assets on the Fed’s balance sheet corresponds with an increase in its liabilities accounted for by the reserve balances of depository institutions held at the Federal Reserve.

The Federal Reserve Act, as amended by Section 2a, states the monetary policy objectives of the Federal Reserve (commonly referred to as the "dual mandate") as:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.

The Federal Open Market Committee (FOMC) — the monetary-policy making body of the Federal Reserve — does not have official targets for the unemployment and inflation rates that the Committee considers consistent with these goals. However, four times a year, each participant in the FOMC submits projections for the expected path of output growth, inflation and the unemployment rate over the next three years. These projections also include long-run forecasts of these key economic variables.

The long-run forecasts represent each participant's assessment of where output growth, inflation and unemployment would tend to in the long run in the absence of further shocks and under appropriate monetary policy. Hence, these long-run projections can be viewed as the participants' assessment of the rates of output growth, inflation, and unemployment that are consistent with the monetary policy objectives of the Federal Reserve.