Volcker, his successor, Alan Greenspan, and other Fed officials found a way around that awkwardness. For years, when members of Congress hauled them to Capitol Hill to ask what the bank was doing to promote maximum employment, they simply said that low and stable inflation would do the trick. In other words, don’t look for a quick fix. Employers wouldn’t hire and the economy wouldn’t grow quickly amid runaway prices. Recalling the unpopular heroism of the Volcker years, Fed officials after him told the oversight committees that they needed enough independence to make tough inflation-fighting calls, and that lawmakers should back off their employment complaints.
Over the years, this view—that growth depends on stable prices—took hold. Conservative opponents of the dual mandate, including those at the Fed, say the bank can’t do much to influence the job market anyway, so it should focus narrowly on its main policy lever (short-term interest rates) to fight inflation or, in rare cases, to prevent price declines known as deflation that tend to occur only in severe downturns such as the Great Depression. During the 1990s, Sen. Connie Mack III, a Florida Republican, pushed a bill that would have made price stability the Federal Reserve Board’s main objective. The bill found support among some Fed officials, including presidents of its regional banks.
If conflict between the two mandates was just a theoretical menace, conservatives saw a more immediate cause for anxiety when Bernanke began his Shermanesque march on joblessness. Suddenly, it seemed possible that all of the Fed’s new tools (its bond-buying schemes and its declarations of long-term intent) put entirely new incentives in place. When interest rates stay low, conservatives said, investors “reach for yield”—the practice of taking riskier but potentially more rewarding positions. Safe securities (long-term Treasuries or high-quality corporate bonds) no longer offer big returns, so buyers might rush into stocks or junk bonds, causing an asset bubble. Esther George, president of the Federal Reserve Bank of Kansas City, voted in January against continuing the board’s “quantitative easing” program because she thinks “financial imbalances” could make the country vulnerable to another crisis.
With the biggest financial fires of the crisis now out, the dual doubters are pressing their case. They say Bernanke is giving the economy a “sugar high” that will ultimately send prices soaring. That’s why, last month, Republican Sens. Corker and David Vitter of Louisiana introduced the Federal Reserve Single Mandate Act of 2013, which would direct the bank to seek “long-term price stability [and] a low rate of inflation.” By stripping the max-employment mandate, they hope to give the bank less leeway to take the kinds of actions Bernanke has favored. The dual mission fostered “within the Fed an overconfidence in their abilities, especially recently,” Corker says. “This most recent quantitative easing … is about one thing, and it is about unemployment.”
On the other side, most economists see less to worry about. The Consumer Price Index has been running at an annual rate of 1.6 percent, below the 2 percent rate that even inflation hawks view as moderate. The PCE deflator, an inflation gauge the Fed watches closely, is at an even more modest 1.3 percent. Bernanke has a Zen demeanor, but when Corker attacked his anti-inflation credentials at the Tuesday hearing, he shot back. “You called me a dove. Well, maybe in some respects I am,” he said. “But on the other hand, my inflation record is the best of any Federal Reserve chairman in the postwar period. Or at least one of the best.”
Removing the employment mission would allow the Federal Reserve—one of the few institutions that can shape the economy—to stand by and do nothing about the 7.9 percent unemployment rate, dual defenders say. Harvard economist Benjamin Friedman teased out this scenario in a 2008 paper that envisions a Senate hearing during an economic crisis with 17 percent unemployment. With only prices to worry about, the Fed chairman could tell the panel that he is “pleased to report that during the past year U.S. monetary policy has been outstandingly successful.” The chairman might cite an inflation rate of 1.5 percent and conclude by saying, “My colleagues and I are here to accept this committee’s congratulations and those of the American people.” This is reductio ad absurdum, but it’s not impossible in a future where the Fed doesn’t bother about jobs.
For now, critics on the Fed’s left argue that the bank has done too little, not too much, for the job market. “Do you agree that at least for the next few years the danger of inflation is quite low?” Sen. Chuck Schumer, a New York Democrat, asked Bernanke at a hearing last summer. Yes, the banker responded, and there was even a modest risk of deflation. Schumer went on: “And you certainly agree that unemployment has been too high and is sticky, and despite ... two false starts, that we’re having a much rougher time than we ever imagined getting unemployment down?” Bernanke agreed. “So, get to work, Mr. Chairman,” the senator said, chuckling.