The Fed's New Dual Mandate

As most of us probably know by now, the Federal Reserve operates under a “dual” mandate from Congress to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” (Leave it to the federal government to give a “dual” mandate three goals. But I digress).

Since the Fed effectively gets its mandate from Congress, it stands to reason that Congress can also change the mandate if it wants. Forthwith, I am humbly suggesting that it do just that. Namely, the word “moderate” should be replaced by the words “zero percent,” while the Fed will be given a new directive to ensure that stock prices rise by at least 8% a year. Given this new command, the “stable prices” mandate may have to go, but I’m sure reasonable people can agree that’s a small price to pay (no pun intended) for a guarantee against any investor losing money.

I’m confident that this is one thing that President Trump, who says he’s a “low-interest person,” and the Democrats in Congress, who need lots of wealthy people to support their socialist agenda, can wholeheartedly embrace. I’m sure Fed chair Jerome Powell and his successors will be happy, too, since it will forever protect them from any political criticism.

Certainly, every investor would embrace this enthusiastically, too. After all, isn’t this basically what critics have been hammering the Fed about for the past several months? Given a mandate like this, no investor will have anything to complain about ever again.

For equity investors, a guaranteed 8% return year after year is a dream come true. For bond investors, 0% bond rates wouldn’t be anything to cheer about, but current holders of bonds would be thrilled, as the prices of their holdings would soar through the roof, more than making up for the loss of future interest payments.

In order to enforce this new dual mandate, of course, the Fed would need to constantly buy up stocks and bonds in order to support that 8% growth rate and 0% bond rate. But that shouldn’t be that much of a problem. After all, the major international central banks – the Fed, the Bank of Japan, the European Central Bank and the Bank of England – have had lots of practice in doing that the past 10 years. Now they can really go wild.

The new mandate would also be a boon to taxpayers. With interest rates basically locked in at 0%, interest on federal government debt would basically disappear from the federal budget. Under such a scenario, Congress and the president could easily balance the budget with such a big line item removed, or they could simply spend that difference on some new entitlement program, like Medicare for all, while not having to raise taxes.

At the same time, with the Fed buying up just about every dollar of Treasury debt, the federal debt would also magically vanish. It’s the perfect solution to the debt bomb.

Think how much easier the Fed’s job will be – and how much more fun. Talk about an unlimited expense account. Of course, the Fed pretty much had that already; now it would have government sanction to do whatever it wanted.

It would also put the Fed chair above criticism, making him (or her) truly independent – and mighty popular. We got a small taste of how this might work last Friday.

Just hours after the Labor Department announced a blowout December jobs report, which under normal circumstances should have given Powell more reason to justify his relatively hawkish policies since it provided proof of a robust economy, what did he do? He did the exact opposite, announcing a more dovish stance, saying that the Fed would be more “patient” in raising rates going forward. That sparked a huge rally in stocks, pushing the major equity averages up by 3%.

After the jobs report came out, my first reaction was that it would be bearish for stocks, since it might induce the Fed to keep tightening. Boy was I wrong. It now appears that critics of tight monetary policy, from President Trump on down, have gotten to Powell and his colleagues. To avoid future confusion about Fed monetary policy, changing the mandate makes sense.

I think my idea for a new Fed mandate has merit, and I have the perfect person to head up the Fed if Mr. Powell decides that truly putting Fed policy on autopilot is too boring and not challenging enough.

I seem to remember that there was a guy about 10 years ago who promised his investors a guaranteed, steady 8% return on their money. He attracted billions of dollars from sophisticated and wealthy investors, and then he suddenly disappeared. His name escapes me at the moment. It’ll come to me.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.