How Does the Fed Interpret and Pursue the Dual Mandate?

The Federal Reserve has two main objectives for monetary policy: to pursue maximum employment and price stability. These objectives, given to the Fed by Congress, are frequently referred to as the dual mandate.1. Congress also tasked the Fed with promoting moderate long-term interest rates. As noted on the Board of Governors website, an economy with maximum employment and stable prices “creates the conditions needed for interest rates to settle at moderate levels.”

How does the Federal Open Market Committee (FOMC), which is the Fed’s main monetary policymaking body, interpret the dual mandate and go about achieving those two goals? That’s where the Fed’s monetary policy framework comes in.

The framework describes the FOMC’s approach to monetary policy. It includes how the FOMC interprets maximum employment and price stability as well as the strategy and tools to be used to achieve those objectives, said St. Louis Fed economist Fernando Martin. This information is outlined in the FOMC’s Statement on Longer-Run Goals and Monetary Policy Strategy.

I spoke with Martin, a senior economic policy advisor in our Research division, about how the FOMC interprets the dual mandate, why there isn’t an explicit target for maximum employment, what happens when the inflation and employment goals seem to be in conflict, and more.

The following highlights from our discussion focus on the monetary policy framework and the statement on longer-run goals as of Aug. 22, 2025, and reaffirmed Jan. 27, 2026. The FOMC periodically reviews and adjusts its framework, as discussed later in this blog post.

What Is Price Stability? Why Does the Fed Target 2% Inflation?

“Prices are considered stable when consumers and businesses do not have to worry about costs significantly rising or falling when making plans, or when borrowing or lending for long periods,” according to a Board of Governors FAQ.

The FOMC has deemed an annual inflation rate of 2% to be most consistent with the price stability mandate—hence the Fed’s 2% inflation target. While the FOMC looks at many measures to assess inflation, the target is based on the annual change in the overall, or headline, price index for personal consumption expenditures (PCE). The chart below plots headline PCE inflation and core PCE inflation (which excludes food and energy prices) since 2012, which is when the Fed adopted an explicit inflation target.

The FOMC aims to hit 2% over the longer run. “This means sometimes inflation will be above 2% and sometimes it will be below, but the FOMC is always aiming toward 2%,” Martin explained.

The strategy the FOMC currently follows is a change from the previous monetary policy framework, which had been adopted in 2020 after years of inflation persistently running below 2%, Martin noted. Under that previous framework, the FOMC followed “flexible average inflation targeting,” seeking to achieve 2% on average by aiming for inflation moderately above the target for some time to make up for periods of below-target inflation.

The statement on longer-run goals (PDF) also highlights the importance of well-anchored longer-term inflation expectations for both sides of the dual mandate.

What Is Maximum Employment? Why Isn’t There a Target for It?

“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,” according to the Fed’s current statement on longer-run goals.

In other words, maximum employment is a scenario in which “everyone who wants to work does work or can easily find a job, but as long as it doesn’t risk prices shooting up,” Martin explained.

Why isn’t there a specific target for maximum employment like there is for inflation? Inflation over the longer run is primarily determined by monetary policy (as noted in the statement), but that’s not the case with employment.

Full Employment: The Meaning and Measurement Challenge

“The maximum level of employment is not directly measurable and changes over time owing largely to nonmonetary factors that affect the structure and dynamics of the labor market. Consequently, it would not be appropriate to specify a fixed goal for employment,” the longer-run goals statement says.

Take the labor force, for instance, which is the sum of people who are employed and those who don’t have a job but are actively seeking one. Martin explained that a lot of life decisions—for example, choosing to retire, go to school or become a homemaker—can place people outside of the labor force. Furthermore, the size of the labor force (in levels and as a share of the population) can change over time due to demographics, immigration policies, technological changes that affect employment and education decisions, and other factors. Therefore, it would be difficult to try to target a maximum labor force level or labor force participation rate.

What about the unemployment rate? The optimal rate isn’t 0% because it takes time to find a job, Martin said. Another consideration is which measure of unemployment to use. The official unemployment rate from the Bureau of Labor Statistics doesn’t include those who want a job but have dropped out of the labor force because they’re discouraged, he noted. These are among the reasons targeting a specific unemployment rate would be difficult.

How Does the FOMC Gauge Whether the Labor Market Is at Maximum Employment?

Policymakers look at a variety of indicators—the unemployment rate, payroll employment, the vacancy-to-unemployed ratio, and so on—to make a general assessment of the overall health of the labor market, Martin said. The chart below shows the unemployment rate and the monthly change in payroll employment in recent years.

“It’s a judgment call at the end of the day,” Martin said. “It’s part of the art of monetary policy. There’s science, but there’s also art.”

How Does the Fed Work to Achieve the Dual Mandate?

To influence inflation and employment, the FOMC adjusts the stance of monetary policy. The main way it does this is by changing the target range for the federal funds rate (i.e., the policy rate).

Martin noted the stance of monetary policy can be:

• Accommodative to stimulate or help strengthen the economy—for example, if inflation is below target and the unemployment rate is high
• Restrictive to cool an overheating economy—for example, if inflation is above target and the unemployment rate is low
• Neutral to neither support nor cool the economy—for example, if inflation is around target and the labor market is healthy

In the examples above, both sides of the dual mandate are complementary, and there would not be a trade-off between the two. But that’s not always the case.

What Happens If the Fed’s Dual Mandate Goals Are in Conflict?

Let’s say inflation is running above target at a time when the labor market is deteriorating or there’s a risk of that happening. Since the FOMC has two objectives but one main policy instrument (the federal funds rate), Martin noted the FOMC would have to decide what to do: continue fighting inflation to bring it back to 2% or help prevent further deterioration of the labor market.

The FOMC “follows a balanced approach” in promoting its two goals when they’re not complementary, according to the statement on longer-run goals. The FOMC will look at where inflation and employment are relative to the stated goals and will also consider how long it is expected to take for each one to return to its goal, Martin explained. (Martin analyzed the dual mandate in conflict in a St. Louis Fed On the Economy blog post.)

The FOMC will pursue both goals at the same time to the extent possible, or will start prioritizing the one that seems more of a concern while always being cognizant of the other, Martin said.

Periodic Reviews of the Monetary Policy Framework

The FOMC first adopted the statement on longer-run goals and monetary policy strategy in January 2012 and has reaffirmed the statement each year, with some adjustments.

The FOMC also conducted two public reviews of its monetary policy strategy, tools and communications, which concluded in 2020 and 2025. Reviews allow the FOMC to update its framework to reflect lessons learned about the economy and policymakers’ assessments of how best to achieve the dual mandate.

“The framework has elements that don’t change, including the goals set by Congress,” St. Louis Fed President Alberto Musalem said at the Bank’s April 2025 Fed Listens event. “It also includes elements that have changed over time as the Fed’s monetary policy committee—the FOMC—has refined its approach in response to new information, changes in the economic environment and lessons from experience.”

New Fed Chairman Kevin Warsh has talked about the need for reforms to the Fed’s frameworks and communications—for example, during his nomination hearing in April 2026 and his press conference following the June 2026 FOMC meeting. At the press conference, he announced the creation of five task forces to examine current practices and propose next steps for policymaker consideration in areas central to monetary policymaking.

Note

1. Congress also tasked the Fed with promoting moderate long-term interest rates. As noted on the Board of Governors website, an economy with maximum employment and stable prices “creates the conditions needed for interest rates to settle at moderate levels.”