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Monetary policy has important effects on both prices and employment. Thus it makes sense that the Fed’s Congressional mandate would include both of those variables. Now former VP Mike Pence has proposed replacing the Fed’s so-called “dual mandate” with a single mandate for price stability. Here’s Bloomberg:

Former Vice President Mike Pence is calling for an end to the Federal Reserve’s dual mandate, saying the central bank should focus solely on fighting inflation and leave creating jobs to Congress and the president.

I don’t believe that’s a good idea. When there is a negative supply shock such as the Ukraine War, it makes sense to allow modestly higher prices for a period of time, rather than depress non-oil prices sharply enough to stabilize the overall price level. That’s why I favor targeting NGDP rather than inflation.

If Congress wishes to give the Fed a single mandate, it should not be inflation. Rather, it should be the thing that impacts both inflation and employment. That thing is sometimes called “aggregate demand”. But aggregate demand is too poorly defined as a concept to be included in a Congressional mandate. (Although I suppose you could say the same about inflation.) Instead, a single mandate might use a real-world proxy for aggregate demand, such as national income. Here’s a possible Fed mandate:

The Federal Reserve shall insure a stable path for total national income at a growth rate that is consistent with a relatively low inflation rate over time.

If Congress insists on a specific figure for the average inflation rate, that’s fine. But I doubt whether Congress could agree on such a figure.

With my proposed mandate, the Fed would be effectively targeting NGDP. In that case, there would be no need for specific inflation and employment mandates, as NGDP is the thing that influences both inflation and employment.

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