A few weeks ago Paul Ryan and I wrote an article proposing changes in the Federal Reserve Act. One change would require the Fed to focus on “the single goal of long-run price stability within a clear framework of overall economic stability.” Since then some have argued that changing the dual mandate in this way would not have prevented the recent highly discretionary monetary policy, which, in my view, has on balance been counterproductive. For example, Greg Mankiw writes on his blog that “If the Fed’s mandate were different, monetary policy today might well be the same. That is, with inflation now below its target, the Fed could be pursuing QE2 even if it were operating under the proposed mono mandate.” Similarly, in today’s Wall Street Journal Marc Sumerlin writes that such a change would “actually be supportive of the Fed’s current program.”
But there are several reasons to believe that QE2 would not have happened had Fed officials not been able to refer to a dual mandate in the Federal Reserve Act as justification for the intervention.