What is the Fed's dual mandate?

The Federal Reserve's dual mandate is established by the Federal Reserve Act, which directs the Fed to conduct monetary policy so as to promote "maximum employment" and "stable prices." These two objectives, sometimes in tension with each other, define the boundaries within which all Fed policy decisions are made. A third statutory objective, "moderate long-term interest rates," is generally understood to follow from achieving the first two.

Maximum employment does not mean zero unemployment, because some level of frictional and structural unemployment always exists as workers transition between jobs. The Fed interprets maximum employment as the highest level of employment consistent with stable inflation. This threshold changes over time as demographics, technology, and labor market institutions evolve. Importantly, the Fed revised its framework in 2020 to define shortfalls of employment as a policy concern rather than "deviations," signaling that it would not preemptively tighten just because unemployment fell below its estimated equilibrium.

Stable prices is operationalized as 2% inflation measured by the personal consumption expenditures (PCE) price index. The 2% target was formally announced in 2012 and provides a concrete, publicly verifiable benchmark against which the Fed's performance can be judged. The 2020 framework revision added "average" inflation targeting, indicating the Fed would aim for 2% on average over time rather than as a ceiling at every point.

The tension between the two mandates is most acute during supply shocks. When oil prices spike, inflation rises (calling for tighter policy to fulfill the price stability mandate) but economic activity weakens and unemployment rises (calling for easier policy to fulfill the employment mandate). The Fed must judge which risk is greater and accept some compromise on one objective to protect the other. During the 2022-2023 tightening cycle, the Fed prioritized the price stability mandate, accepting the risk of higher unemployment to bring inflation back to target. How the Fed weighs these tradeoffs in real time is the essence of monetary policymaking.