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Last Updated: 03/20/20

The Federal Reserve's Dual Mandate

Current performance against Fed's Dual Mandate target

The monetary policy goals of the Federal Reserve are to foster economic conditions that achieve both stable prices and maximum sustainable employment.

Learn more about how the Federal Reserve measures and interprets its dual mandate objectives.

Keywords: dual mandate, FOMC, goals, Personal Consumption Expenditures, full employment, Summary of Economic Projections


Our two goals of price stability and maximum sustainable employment are known collectively as the "dual mandate."1 The Federal Reserve's Federal Open Market Committee (FOMC),2 which sets U.S. monetary policy, has translated these broad concepts into specific longer run goals and strategies.3

Price Stability

The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for Personal Consumption Expenditures (PCE), is most consistent over the longer run with the Federal Reserve's statutory mandate. The Committee has also explicitly noted that the inflation target is symmetric and stated that it "would be concerned if inflation were running persistently above or below this objective."

Maximum Sustainable Employment

Many nonmonetary factors affect the structure and dynamics of the labor market, and these may change over time and may not be measurable directly. Accordingly, specifying an explicit goal for employment is not appropriate. Instead, the Committee’s decisions must be informed by a wide range of labor market indicators.

Information about FOMC participants' estimates of the longer-run normal rate of unemployment consistent with the employment mandate can be found in the Summary of Economic Projections (SEP).4 Most recently, the median Committee participant estimated this rate to be 4.1 percent.

Learn more about progress towards our dual mandate goals and how the Federal Reserve balances its two objectives.

Keywords: bullseye, core inflation, unemployment rate, policy loss


Historical performance against Fed's Dual Mandate target
Notes: The dot for the current situation indicates the three-month average of both the unemployment rate and the year-over-year percent change in inflation as measured by the core PCE price index; un is the median FOMC participants’ estimate of the longer-run normal level of unemployment as reported in the most recent Summary of Economic Projections. Because of rapidly changing events, the FOMC will not release an SEP in March 2020 and expects a normal schedule to resume in June.
Source: Federal Open Market Committee, U.S. Bureau of Labor Statistics, and U.S. Bureau of Economic Advisors from Haver Analytics.

Individual dots in the bullseye chart show the combination of the prevailing unemployment rate and inflation rate at various times. The chart provides a means of visualizing the simultaneous progress toward each dual mandate goal. Note that the current dot is much closer to the bullseye than the dot for 2009. This is largely due to the steady decline in the unemployment rate since its peak late that year. With the exception of a brief period in mid-2018, core inflation5 has consistently been below our 2 percent target. More information on progress toward our unemployment and inflation objectives can be found here.

Prior to the outbreak of the coronavirus, the economy was on a strong footing. The median FOMC participant’s baseline outlook made in December 2019 was for economic expansion and inflation rising near our symmetric 2 percent target by the end of 2021, as shown in the chart below. Since then, events have evolved rapidly and made projections less reliable.6 The outlook depends on the spread of the virus, measures taken to slow its transmission, and how long the situation continues. As Chairman Powell noted in his March 15 press conference call, the coronavirus outbreak will restrain economic activity in the near term and will likely hold down inflation this year.

Recent performance against Fed's Dual Mandate target 
Notes: The 2019-2022 values are the medians of FOMC participants' projections of the unemployment rate and core inflation as reported in the most recent Summary of Economic Projections. The dot for the current situation indicates the three-month average of both the unemployment rate and the year-over-year percent change in inflation as measured by the core PCE price index; un is the median FOMC participant’s estimate of the longer-run normal level of unemployment. Because of rapidly changing events, the FOMC will not release an SEP in March 2020 and expects a normal schedule to resume in June. Source: Federal Open Market Committee, U.S. Bureau of Labor Statistics and U.S. Bureau of Economic Advisors from Haver Analytics.

Learn more about how FOMC participants expect the federal funds rate to evolve.

Keywords: federal funds rate, dot plot, gradual path


The FOMC conducts monetary policy primarily by adjusting the federal funds rate7, which is our main policy rate. Learn more information about the federal funds rate, here.

Prior to the outbreak of the coronavirus, the economy was near our dual mandate objectives. FOMC participants' individual assessments of the appropriate monetary policy supporting their forecasts for the next three years and over the long-run are summarized in the Federal Open Market Committee's well-known "dot plot." The most recent assessments made in December 2019 are shown in the chart below. The median assessment for each year and for the long run is indicated by the red dot. At that time, most FOMC participants anticipated that future rate increases would be very gradual and no one foresaw the need for future rate cuts. The median FOMC participant expected the federal funds rate to settle over the longer run at 2.5 percent.8

target fed funds rate chart
Notes: Each shaded circle indicates the value (rounded to nearest 1/8 percentage point) of an individual FOMC participant's judgment of the appropriate level of the target federal funds rate at the end of the specified calendar year or over the longer run as reported in the most recent Summary of Economic Projections. Each red dot indicates the median projection. The green square indicates the current federal funds rate. Because of rapidly changing events, the FOMC will not release an SEP in March 2020 and expects a normal schedule to resume in June. Source: Federal Open Market Committee from Haver Analytics.

The rapid spread of the coronavirus has caused the FOMC to quickly alter its assessment of the appropriate stance for monetary policy. On March 3, 2020 in an unusual intermeeting move, the FOMC voted unanimously to reduce the target range for the federal funds rate by 1/2 percentage point to 1 to 1-1/4 percent. Less than two weeks later and in another unusual move, the FOMC shifted its scheduled March meeting forward a few days and on March 15, 2020 announced its decision to lower the target range for the federal funds rate 1 percentage point to 0 to 1/4 percent, its effective lower bound. The current federal funds rate is shown by the green square in 2020. Looking forward, the Committee expects to maintain the current target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. More information on the Federal Reserve’s response to the virus can be found here.

Notes

1 In 1977, Congress amended the Federal Reserve Act, directing the Board of Governors of the Federal Reserve System and the Federal Open Market Committee to "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."

2 The FOMC is made up of the seven members of the Board of Governors; the president of the Federal Reserve Bank of New York; and presidents of four other regional Federal Reserve Banks who vote. 

3 The FOMC's longer-run goals were first articulated in its January 25, 2012, press release and have been reaffirmed annually thereafter. The most recent statement was amended effective January 29, 2019.

4 The Summary of Economic Projections (SEP) are released four times a year and give FOMC participants' forecasts of key economic metrics over the next three years and for the longer run. Specifically, the participants provide their forecasts of real gross domestic product (GDP) growth, the unemployment rate and inflation, along with individual assessments of the appropriate monetary policy that support those forecasts. The most recent SEP is dated December 11, 2019. Because of rapidly changing events, the FOMC will not release an SEP in March and expects a normal schedule to resume in June.

5 Core inflation strips out the volatile food and energy price components and is a better indicator of underlying inflation trends.

6 Consequently, the FOMC will not release an SEP in March 2020 as originally scheduled and expects to return to a normal SEP release schedule in June 2020.

7 To be precise, certain financial institutions hold reserve balances at the Federal Reserve (depository institutions, Federal Home Loan Banks, Fannie Mae and Freddie Mac, etc.). The federal funds rate is the interest these institutions charge when they lend reserves to other institutions overnight.

8 The projections for the longer-run normal federal funds rate have declined from 4.25 percent in January 2012 when the first projection was made.

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