Skip to content

Ask an Economist


Richard G. Anderson
Sunday, April 1, 2012

Richard G. Anderson is an economist in the Research division. He joined the Federal Reserve Board staff in Washington, D.C., in 1988. He transferred to the St. Louis Fed in late 1992. He is a native Minnesotan with a bachelor's degree from the University of Minnesota and a Ph.D. from MIT in Cambridge, Mass. He is also a visiting professor in the Management School at the University of Sheffield, Sheffield, U.K., and is a member of that school's international academic advisory committee. His research interests include applied econometrics, macroeconomics and financial markets. Beyond economics, he has extensive background and experience in information technology. For more on his work, see

Q. On Jan. 25, the Federal Open Market Committee issued a press release summarizing its "longer-run goals and monetary policy strategy." Chairman Ben Bernanke, in his press conference on the same day, referred to 2 percent inflation as an "inflation target." Why did the FOMC set an inflation target?

A. Setting a long-run inflation goal, or target, is an important element in achieving the Federal Reserve's mandate from Congress. Further, the FOMC has behaved for a number of years as if a 2 percent long-run inflation rate was its target. The announcement removes any remaining doubts.

Commentators sometimes incorrectly discuss the Federal Reserve as if it were an independent fourth branch of government, similar to Congress, the Supreme Court or the executive branch. It is not. The Federal Reserve was created by Congress in 1913, and Congress sets guidelines for the Federal Reserve's conduct of monetary policy.

Prior to World War II, the Federal Reserve's principal focus was on banking and financial market stability, including providing additional money and credit during economic expansions and assisting banks during financial panics. As the war ended, Congress feared that high unemployment would follow reductions in government spending and that inflation would follow the end of price controls. In the Employment Act of 1946, Congress charged the Federal Reserve with adopting policies to promote both maximum economic growth and stable prices—the so-called dual mandate.

Tension has often surrounded the dual mandate. The historical record suggests that policies to reduce unemployment may be ill-suited to periods of high inflation and that policies to reduce inflation tend to slow aggregate demand and increase unemployment. In its Jan. 25 announcement, the FOMC clarified that its monetary policy is the primary determinant of the economy's long-run inflation rate. Because uncertainty regarding long-run inflation harms long-run economic growth, a long-run inflation objective (or target) is an important aspect of fulfilling the FOMC's dual mandate from Congress.

For related reading, see the President's Message.

Commenting Policy: We encourage comments and discussions on our posts, even those that disagree with conclusions, if they are done in a respectful and courteous manner. All comments posted to our blog go through a moderator, so they won't appear immediately after being submitted. We reserve the right to remove or not publish inappropriate comments. This includes, but is not limited to, comments that are:
  • Vulgar, obscene, profane or otherwise disrespectful or discourteous
  • For commercial use, including spam
  • Threatening, harassing or constituting personal attacks
  • Violating copyright or otherwise infringing on third-party rights
  • Off-topic or significantly political
The St. Louis Fed will only respond to comments if we are clarifying a point. Comments are limited to 1,500 characters, so please edit your thinking before posting. While you will retain all of your ownership rights in any comment you submit, posting comments means you grant the St. Louis Fed the royalty-free right, in perpetuity, to use, reproduce, distribute, alter and/or display them, and the St. Louis Fed will be free to use any ideas, concepts, artwork, inventions, developments, suggestions or techniques embodied in your comments for any purpose whatsoever, with or without attribution, and without compensation to you. You will also waive all moral rights you may have in any comment you submit.
comments powered by Disqus

The St. Louis Fed uses Disqus software for the comment functionality on this blog. You can read the Disqus privacy policy. Disqus uses cookies and third party cookies. To learn more about these cookies and how to disable them, please see this article.