The Federal Reserve's Dual Mandate
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
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 4.2 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
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. Core inflation5 has consistently been below our 2 percent target and neared our symmetric target in March 2018, where it remained for the rest of the year. However, inflation trends softened significantly at the beginning of the year and have only recently improved. More information on progress towards our unemployment and inflation objectives can be found here.
Over the next few years, the median FOMC participant foresees the unemployment rate falling moderately below its long-run rate and inflation moving up to the 2 percent target as shown in the chart below.
Learn more about how FOMC participants expect the federal funds rate to evolve.
Keywords: federal funds rate, dot plot, gradual path
The economy is near our dual mandate objectives. The median FOMC participant’s baseline outlook is for sustained economic expansion and inflation rising near our symmetric 2 percent target by the end of 2021. This is a similar outlook to that made in December 2018. However, weak global growth, trade policy uncertainty, and muted inflation have prompted the FOMC to significantly reduce its assessment of the appropriate path of interest rates that would best support that outlook. In September, the median participant judged the appropriate federal funds rate path to be at least 100 basis points lower than the median participant had envisioned at the end of last year. At its July 2019 meeting, the Committee voted to cut the federal funds rate range by 25 basis points from 2-1/4 to 2-1/2 percent to 2 to 2-1/4 percent.7 It reduced the federal funds rate range by an additional 25 basis points to 1-3/4 to 2 percent in September.
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 median assessment for each year and for the long run is indicated by the red dot.
In September, the median participant envisioned the federal funds rate to be 1.9 percent by the end of 2019 and 2020, 2.1 percent by the end of 2021, and 2.4 percent by the end of 2022.8 Compared to projections made in June, the distribution of participants’ assessments of appropriate policy has shifted lower. Having implemented one 25 basis point decrease in July and another in September, this path is consistent with no change in the federal funds rate target range through 2020, one 25 basis point increase by the end of 2021, and possibly an additional 25 basis point increase by the end of 2022. However, almost half of participants anticipate one more 25 basis cut by the end of 2020 will be appropriate.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.9
The median FOMC participant expects the federal funds rate to settle over the longer run at 2.5 percent. 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.
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 September 18, 2019.
5 Core inflation strips out the volatile food and energy price components and is a better indicator of underlying inflation trends.
6 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.