The Federal Reserve has two goals: to keep inflation under control and to strive for maximum employment. Mike Pence, who served as Donald Trump's vice president and is vying to helm the White House, is campaigning on eliminating the Fed's employment mandate.
It wouldn't be a terrible idea, according to some economists, but ditching the employment mandate doesn't sit well with Democrats, who believe it is crucial for the central bank to consider the impact of its monetary policy decisions on jobs. And while Fed Chair Jerome Powell's appearance before congressional lawmakers last week made it crystal clear that Democrats cherish the Fed's employment mission, it is unclear how many Republicans back Pence's stance.
The federal law that established the Fed more than a century ago was amended in 1977 to reform the central bank during a time of rampant inflation and high unemployment, infamously known as the era of stagflation. One of those reforms was to require the Fed to promote full employment, in addition to price stability.
The Fed has a clear 2% goal for inflation at all times. But for employment, the only goal is to be sustainably robust, consistent with that inflation target.
It's been more than 40 years since the Fed has been guided by its dual mandate — and there are two key questions to consider when assessing that track record: How effective has the Fed been in achieving maximum employment? And what would change if the employment mandate is done away with, if anything?
Economists, including a former Fed governor, shared their thoughts with CNN.
Against the employment mandate
The Federal Reserve Reform Act of 1977, signed into law by former President Jimmy Carter, made employment the shared responsibility of the central bank, lawmakers and government agencies in striving to achieve that goal. But some economists argue that fiscal policy is more effective.
During his remarks last week, Powell said the Fed's main policy tool — the federal funds rate — is limited. It can't address labor shortages, demographic disparities, or create jobs, at least not directly. Interest rates do impact the labor market, eventually, but addressing inflation has the same effect.
"By asking the Fed to simply focus on inflation, it's not ignoring developments in the labor market, but it's achieving exactly the same goal," said Peter Ireland, an economics professor at Boston College who researches monetary policy. He pointed to the Great Recession, when unemployment soared, but the economy also dealt with inflation running below the central bank's 2% target.
"A single mandate, as opposed to the dual mandate, would have left the Fed with the principal task of doing whatever it can to make monetary policy more accommodating to bring inflation back up to target, facilitating the recovery in the labor market, so that shows there would have been no tradeoff between the inflation and employment goals with a single mandate," he said.
Fiscal policy initiatives, such as stimulus packages during economic downturns, have proven to be quicker and more effective at bolstering the labor market, Ireland said.
During the 2020 pandemic-induced recession, the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act kept workers on payrolls while funding the costly public health response to Covid. And the $1.9 trillion American Rescue Plan passed in 2021 provided $40 billion toward workforce development. Tweaking the Fed's benchmark lending rate simply doesn't buttress the labor market in the same direct manner.
In defense of the Fed's employment goal
Other economists argue that the dual mandate is flexible, that it evolves with the circumstances and complements the price stability mandate, meaning that lawmakers should leave the dual mandate as is.
"When inflation is high like today and unemployment is low, it's all about price stability, that's overwhelmingly the goal — almost the single goal," said Laurence Meyer, an economist who served as a Fed governor from 1996 to 2002. "And in normal times, both mandates are equally important."
Adriana Kugler, the seasoned labor economist whom President Joe Biden tapped to fill a vacant seat on the Fed's Board of Governors, echoed that theory during her confirmation hearing last week before the Senate Banking Committee.
"I truly believe that both sides of the mandate are very important," she told lawmakers. "Right now, the inflation side is critical."
Meyer said "maximum employment" is open to interpretation by the Fed and depends on the economy's circumstances at the time.
"You can set an objective for inflation, but you can't set an objective for the unemployment rate, you have to let the structure of the economy dictate just how low it can be without creating higher inflation," Meyer said.
And at times, the labor market can be a stubborn source of inflationary pressure — like right now. Ben Bernanke, a former Fed chair who steered the central bank during the 2008 financial crisis, argued as much in a recent paper he co-authored. In this current scenario, today's low 3.7% unemployment rate is not consistent with 2% inflation, though economists, including Powell, have focused more on other employment measures such as the ratio of vacancies to the unemployment level.
Powell has repeatedly mentioned that it's imperative to get the labor market "back into better balance," meaning that labor demand and supply are as close to one-to-one as possible. Powell has raised the issue of job vacancies disproportionately exceeding the number of unemployed workers, though job openings have come down from their peak in March 2022.
Focusing on cooling the labor market would likely help bring down inflation.
The politics of it
As Chair Powell stresses during every post-meeting press conference, the Fed is in service to the American people — and to Congress. Lawmakers on Capitol Hill, with the sitting president's approval, can simply amend the Federal Reserve Act to eliminate the employment mandate or even add another one. In CNN's town hall with Pence earlier this month, the former vice president again floated the idea of eliminating the employment mandate.
"I think we've got to get the Federal Reserve back to doing its job, which is protecting the currency," Pence said. "We ought to look to the president, we ought to look to the Congress to promote policies that ensure full employment... we've been passing the buck to the Fed for too long, let them protect the dollar, and let's hold our political leaders to account for keeping Americans working."
Pence added that he attempted to legislate that when he was in Congress, but that it never gained any traction.
It seems clear that Democrats would take issue with any attempts to rid the Fed of its employment mandate.
"I caution against any approach in monetary policy that ignores the Fed's maximum employment mandate and results in a recession with millions of people losing their homes and jobs," Rep. Maxine Waters, the House Financial Services Committee's ranking member, said last week.
