Does Fed Policy Reveal a Ternary Mandate? Does Fed Policy Reveal a Ternary Mandate?

By Joe Peek, Eric S. Rosengren, and Geoffrey M.B. Tootell

Although the creation of the Federal Reserve in 1913 was, in part, a response to repeated episodes of financial instability, the Fed is usually described as having a dual mandate, targeting low inflation and full employment. Even so, many would argue that during the recent financial crisis, and perhaps at other times in the more distant past, monetary policy may have reacted to concerns about financial instability. Thus, an important question is whether the Fed should pursue, or in fact is implicitly pursuing, a third mandate related to financial stability. The issue of what the Fed should, and does, target takes on added importance given the current discussions about imposing limits on how monetary policy is implemented. The authors use a new, direct measure of FOMC financial instability concerns constructed from FOMC meeting transcripts to examine whether monetary policy has reacted in a manner consistent with having financial stability as a third mandate.

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