The new Federal Reserve Chair Kevin Warsh is launching a series of structural and procedural changes aimed at reshaping how the Fed conducts monetary policy. The planned changes include, among others, streamlining communications, reducing the balance sheet, and firming their focus on price stability.
This list does not, however, include a review of the Fed’s dual mandate, which is under the remit of Congress. Given that the 1977 Federal Reserve Reform Act established the dual mandate nearly five decades ago, a comprehensive reassessment could also be warranted. The Federal Reserve Reform Act states that, “The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall 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.”
The Federal Open Market Committee further elaborated on the act in its Statement on Longer-Run Goals and Monetary Policy Strategy, first adopted in January 2012 and reaffirmed in January 2024: “The Committee views maximum employment as the highest level of employment that can be achieved on a sustained basis in a context of price stability. The maximum level of employment is not directly measurable and changes over time owing largely to nonmonetary factors… Consequently, it would not be appropriate to specify a fixed goal for employment.” In the same statement, the FOMC reaffirms that 2 percent inflation is most consistent over the long run with the maximum employment and price stability mandates. In the same statement, the FOMC reaffirms that 2 percent inflation is most consistent over the long run with the maximum employment and price stability mandates.
The FOMC Statement makes clear that: (i) maximum level of employment is not directly measurable and constant; and (ii) it is affected by factors outside of the Fed’s control. This can complicate monetary policy conduct, especially when these two objectives are in conflict.
After the 2007-2008 financial crisis, with inflation low and unemployment rate approaching 10 percent, both objectives steered monetary policy in the same direction. Coincidentally, the FOMC’s statement in September 2010 marked the first public emphasis on the statutory requirement to pursue maximum employment. But with two objectives and one tool, a situation was eventually bound to arise when these objectives would conflict.
Most recently, in late 2025 and early 2026, with employment growth weak and disinflation stalling, the Fed had to weigh which objective should be given more weight in monetary policy decisions.
It is generally understood that the Fed’s instruments are more efficacious in targeting inflation rather than employment. There are numerous factors outside the Fed’s remit that affect labor market and employment. This weakens the link between the objective and accountability: an institution could be held accountable only for goals whose achievement it can reasonably control.
One could argue that the dual mandate enjoins the Fed to pursue a less aggressive tightening to bring inflation down to the target. Somewhat higher for somewhat longer inflation could be seen as an acceptable price for higher employment. But a more gradual reduction of inflation is not costless: it could reduce real wages, boost inflation expectations, and make it more difficult to reach the target.
The potential beneficial impact of lower policy rate on employment could be offset by the failure of longer-term interest rates to follow suit, as happened in 2025. The Fed’s leeway in pursuing a less aggressive monetary tightening to reduce inflation depends crucially on its credibility and on low and stable inflation expectations.
This is recognized by many countries where the central bank’s primary objective is price stability. For example, the European Central Bank and the Bank of England prioritize price or monetary stability while simultaneously supporting broader economic policies. The Bank of Japan’s primary objectives include price stability and support to sustainable economic growth. Perhaps the best example offers the formulation of the Bank of Canada’s objective: to maintain low and stable inflation, which supports a stable environment conducive to sustainable growth and employment.
Realistically, the politics of narrowing the Fed’s objectives to inflation is not propitious. As a member of Congress in 2010, former Vice President Pence introduced legislation to remove its full-employment mandate and have the Fed focus on inflation alone, but it went nowhere. Similar fate met the September 2025 House Committee on Financial Services Chairman French Hill’s step. These political challenges should not discourage serious discussion of alternative formulation of the Fed mandate that would better recognize its limited control of employment.
Featured Author:
Jiri Jonas, is a former senior economist at the IMF with 40 years of experience in economic policy, country operations, and analytical work.
All views expressed by members are their own and not reflective of the views of the Bretton Woods Committee.