Full Employment and Price Stability Equals Rate Hike

Federal Reserve

The Federal Reserve has a dual mandate. That is, full employment and price stability. These terms can have a wide range of interpretation depending on the politics of whoever is in office at the time, but they can conservatively be interpreted as historically low unemployment and low inflation.

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The dual mandate does not include economic expansion by GDP numbers, stock market advances, standard of living, wage growth or anything else. Just full employment and price stability. One can argue that the dual mandate should be expanded to include other objectives, but that’s a different issue. We have reached full employment and price stability. Therefore, the Fed should, by its dual mandate, hike rates.

If it doesn’t, then we have to seriously begin questioning what the Fed’s mandate is, or what it thinks it is, and what it’s trying to do. Is the Fed’s job to keep the country out of recession? Who said that this was part of its mandate? Is the Fed’s job to keep the stock market levitated? Where is that written in the Federal Reserve Act of 1913?

Many big Wall Street players are practically begging the Fed not to raise rates next week, saying that it could shake an already unstable economic recovery. But what does that have to do with the Federal Reserve at all? Is the Fed really the guardian of Wall Street? By any measure, we are at historically low unemployment and low price inflation. What else is there to consider?

Of course, it is doubtful that the members of the Federal Reserve Board restrict themselves to only two considerations when deciding to tinker with the nation’s money supply. It is more likely that they see themselves as the central planners of the entire economy, to make sure stocks do not crash, or that recession is avoided.

Yet, by employment levels, inflation, economic growth, and stock market indices, the Fed has failed miserably since its inception. One would think that if the Fed were doing a good job, unemployment numbers would have become more stable in the decades since the Federal Reserve was founded. Economic growth would have stabilized as time goes by. there would be consumer price stability, and stock market stability would tend to increase.

But the opposite is true, by every indicator. Employment levels have gyrated continually since the Federal Reserve’s founding. Economic growth has gyrated up and down through continual and business cycle booms and busts. Price stability is nowhere to be found as inflation has eroded almost all of the dollar’s value over the past 100 years. And stock market booms and crashes have gotten more extreme as the Fed becomes older.

Given that, it is impossible to know what the Fed will do next week, because despite the dual mandate, who knows what really guides it? If it were only the dual mandate, a rate hike would be in the bag. But the Fed sees itself as more than that. In that case, they have become a truly unpredictable institution.

And unpredictability yields volatility.

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