Dual mandate, dual headache: Why the Fed should focus on price stability

With Kevin Warsh set to appear before the Senate for his Fed confirmation hearing, the question of his monetary priorities is taking center stage. Warsh has long emphasized the importance of price stability as a guiding principle. As recently as last year, Warsh stated, “It is the Fed’s duty … to ensure that changes in relative prices don’t become embedded in the economy. The Fed’s job is to stop second-order effects of price changes.”

Yet the Federal Reserve operates under a dual mandate, which requires it to maintain both maximum employment and price stability as goals of monetary policy. If Warsh is serious about prioritizing price stability, he should advocate for Congress to adopt a single mandate focused on price stability. Clear goals, predictable policy, and disciplined rule-following under this single mandate are essential for preventing the Fed from being pulled off course by politics or short-term pressures.

This tension is likely to be a focus of Warsh’s upcoming hearing. A recent policy memo from CEI outlines key questions on which lawmakers should press Warsh, including how he interprets the dual mandate and whether he believes it undermines the Fed’s ability to maintain price stability. These questions go to the heart of whether Warsh would use his position to push for a monetary policy focused on price stability or perpetuate the status quo.

How the Fed got stuck chasing two goals

The Federal Reserve began in 1913 as a narrowly focused institution. It was designed to stabilize banks and supply an elastic currency. Early policymakers saw the gold standard as a natural check on inflation, so explicit price-stability goals were unnecessary. The Fed’s early decades focused on credit flows and financial credibility, not unemployment.

The economic shocks of the Great Depression altered that view. The Employment Act of 1946 declared that maximum employment was a national responsibility. While it did not formally expand into the Fed’s legal mandate, it set the precedent that monetary policy should factor in the broader economy.

In the 1970s, the United States faced stagflation, which is the simultaneous occurrence of high inflation and high unemployment. This tumult prompted the passage of the Federal Reserve Reform Act of 1977. This act codified the dual mandate, which requires the Fed to balance stable prices and maximum employment.

This structure is unusual among central banks in advanced economies. Institutions such as the European Central Bank and the Bank of Canada are formally oriented toward price stability as their primary objective. Others, like the Bank of England, have clearer hierarchies in which inflation control is the dominant goal, as opposed to one of two coequal mandates.

The tug-of-war that never ends

The dual mandate creates inherent tensions in monetary policy, a sentiment that current Fed Chair Jerome Powell expressed in his most recent decision to lower the interest rate. As CEI Senior Economist Ryan Young points out, this tension “limits the Fed’s effectiveness because it requires Fed policymakers to use discretion as to which plank to prioritize at a given time. More discretion means less predictability, which makes long-term investments and other decisions more difficult throughout the economy.”

Rate cuts intended to reduce unemployment can ignite inflation, while measures to fight inflation can suppress hiring and output while tightening credit conditions. The result is uncertainty for businesses, workers, and investors. Even the Fed’s own research suggests that the uncertainty about the natural rates of interest and unemployment complicates the pursuit of its dual mandate.

The dual mandate also encourages short-term interventions. As research from the Federal Reserve Bank of Richmond shows, policymakers can be tempted to prioritize visible improvements in employment or growth at the cost of long-term price stability. This tension can create cycles of overheating and tightening that undermine economic predictability.

If that were not enough, a dual mandate makes the Fed more vulnerable to political pressures. Calls to prioritize jobs or growth can compromise independence and tilt decisions toward temporary popularity instead of long-term stability, much like they have in the past. A clear example of such prioritization was when there was political pressure placed on the Federal Reserve during the Nixon administration, which contributed to the inflationary surge of the 1970s.

The North Star of price stability

Juggling jobs and inflation under a dual mandate is a recipe for policy whiplash. CEI scholars have warned that the dual mandate forces the Fed into a tug-of-war between short-term employment gains and long-term monetary health. If policymakers are serious about preserving the dollar and supporting long-term economic prosperity, Congress should narrow the Fed’s focus to price stability alone.

Empirical cross-country evidence reinforces this point. A recent study analyzing 176 countries from 1985 to 2023 finds that adopting a dual mandate increases inflation by roughly eight percentage points compared with a single mandate focused on checking inflation. The same study finds a dual mandate provides no systematic long-term employment gains. This indicates that a single mandate setup can foster more sustainable growth in the long run because it does not erode purchasing power the same way a dual mandate does.

A single mandate also makes accountability far easier. Without the trade-off dilemma, Congress has a clear metric for success: whether the Fed is maintaining price stability. Lawmakers can assess performance more objectively, and the public can judge monetary policy outcomes without wading through conflicting signals on employment or growth.

Clearly defined policy objectives help anchor expectations and boost credibility. Central banks with an explicit, singular price‑stability objective tend to have more transparent and measurable goals. That setup makes it easier for markets and the public to form stable expectations about future inflation and to judge the central bank’s performance.

From dual dilemma to price discipline

For decades, the Fed’s dual mandate has forced policymakers to choose between short-term employment gains and long-term price stability. The dual mandate has delivered on neither goal. Greater uncertainty has led to increased inflation without meaningful gains in employment.

A single mandate focused on price stability would deliver more sustainable outcomes while providing businesses and workers with more predictable economic conditions. While broader discussions about rules-based policy remain on the horizon, the immediate fix is clear: Congress should absolve the Fed from its dual mandate. No more balancing acts, no more guesswork. For the sake of the US economy, Congress should give the Fed the single goal of maintaining price stability.