Introduction to Monetary Policy
The main impact of monetary policy on most people is how much they have to pay to borrow money to buy a house or car. However, the Federal Reserve, the central bank of the United States, has a broader purpose for its monetary policy, which is mandated by Congress. This purpose is widely known as the Federal Reserve’s dual mandate: promoting maximum employment and stable prices.
The Dual Mandate
The dual mandate is the foundation of the Federal Reserve’s monetary policy decisions. The Fed aims to achieve maximum employment, which means that everyone who wants to work can find a job, and stable prices, which means that inflation is under control. The Fed itself regularly refers to these two objectives in its Federal Open Market Committee statements announcing its monetary policy decisions.
A Third Objective: Moderate Long-Term Interest Rates
There is a third objective of monetary policy that is less well-known: moderate long-term interest rates. This "third mandate" was a big news story in September 2025, when the Trump administration’s newly appointed Fed governor, Stephen Miran, referred to it in his testimony before the Senate Banking Committee. Financial markets paid close attention to this aspect of the testimony because the comments suggested that Miran and other presidential appointees may focus on this third mandate – and on driving down long-term borrowing costs – more than the Fed has in the recent past.
The Fed’s Shifting Goals
The original purpose of the Fed, as explained in the Federal Reserve Act of 1913, was to provide flexibility in the nation’s currency supply and to supervise the U.S. banking system. The current dual mandate was not part of the original goals of the Fed. Instead, its core goal was to reduce the frequent banking panics that were costly to the economy and sharply increased interest rates.
The Evolution of the Dual Mandate
The first big change in the goals, in response to the Great Depression, was the Employment Act of 1946, which stated the goal of federal government policy – and, therefore that of the Fed – is to "promote maximum employment, production, and purchasing power." This is where the two goals of the dual mandate first began to emerge, with purchasing power implying the Fed needed to keep inflation low. Following the macroeconomic instability of the 1970s with high unemployment and high inflation, Congress enacted the Federal Reserve Reform Act of 1977, which formalized the Fed mandate: "maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote the goals of maximum employment, stable prices, and moderate long-term interest rates."
What Happened to the Third Mandate?
So why doesn’t the Fed still talk about the third mandate? Part of the answer is that moderate long-term interest rates are a natural by-product of successfully managing the other two. In pursuit of low inflation and maximum employment, the Fed primarily uses a short-term interest rate, known as the Federal Funds rate. When journalists report that the Fed raised or lowered interest rates, this refers to the so-called target rate that the central bank uses to control the Fed Funds rate.
The Relationship Between Short-Term and Long-Term Interest Rates
Most of the interest rates that matter to people, businesses, and the economy at large have much longer terms – such as five, 10, or 30 years. Examples include mortgages, car loans, and corporate bonds. The Fed does not directly control these longer-term interest rates, which are set by financial markets. However, studies have found that the Fed’s policy decisions can influence long-term rates, primarily due to "expectations theory." That theory argues that long-term rates reflect financial markets’ expectations of future short-term rates.
Promoting Economic Stability
The Fed has, at times, although very rarely, influenced long-term rates directly. For example, in late 2010, following the Great Recession of 2007-2009, the Fed purchased billions of dollars’ worth of long-term Treasury bonds and other securities – a program known as "QE2" for quantitative easing – in an effort to lower the cost of borrowing for consumers and businesses. The Fed did something similar in 1961 with Operation Twist, similarly with an aim to support the U.S. economy by reducing long-term borrowing costs.
Conclusion
In conclusion, the Federal Reserve’s monetary policy has a dual mandate of promoting maximum employment and stable prices. While there is a third objective of moderate long-term interest rates, it is not always explicitly mentioned by the Fed. However, the Fed is keenly aware that longer-term interest rates that are not aligned with its dual mandate can be an important source of instability in the economy. The Fed’s primary goal is to promote stability in the economy, and longer-term interest rates should be at levels that are appropriate to ensure current and future economic stability. By understanding the Fed’s goals and how it achieves them, we can better appreciate the importance of monetary policy in shaping the economy.
