Rosengren Paper Finds FOMC Acts Like It has a Third Mandate

Federal Reserve officials often behave as if they have a mandate to take financial stability into account when they make interest-rate decisions, according to a research paper co-authored by Boston Fed President Eric Rosengren.

“Frequent mentions of financial instability terms at the FOMC, particularly during bust periods, result in a statistically significant reduction in the funds rate,” the paper said. “When it comes to financial instability concerns, not only do FOMC meeting participants talk the talk, but they also walk the walk,” it added, referring to the policy-setting Federal Open Market Committee.

Rosengren, along with co-authors Joe Peek and Geoffrey Tootell, economists at the Boston Fed, are scheduled to present the paper, titled “Should U.S. Monetary Policy Have a Ternary Mandate?,” Friday at the start of a two-day conference hosted by the bank on macro-prudential monetary policy. Fed Vice Chairman Stanley Fischer will speak on the same topic at lunchtime Friday.

The FOMC decided Sept. 17 to hold rates near zero, citing concerns over global economic and financial developments that might cool U.S. growth and inflation. Financial markets were roiled in August after China unexpectedly devalued its currency.

The Fed is charged by Congress to pursue two mandates: maximum employment and price stability, which the Fed defines as 2 percent inflation target over the medium term. The results of the paper “are strongly suggestive that the FOMC often behaves as if monetary policy has a third mandate” to respond to financial instability, the authors wrote.

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