Similarly, the attainment of the statutory goal of moderate long-term interest rates requires price stability, because only then are the inflation premiums that investors demand for holding long-term instruments kept to a minimum.  In sum, achieving price stability is not only important in itself; it is also central to attaining the Federal Reserve's other mandated objectives of maximum sustainable employment and moderate long-term interest rates.

Suppose a central bank successfully adopted a formal inflation guideline that respects a dual mandate by flexibly adjusting the time horizons for achieving the guidelines.  Would this policy look any different from current Fed policy?

One concern, which I share, is that some may misinterpret the enunciation of a long run inflation objective as a down-weighting of the Committee’s mandate to foster maximum employment. To reduce the risk of such an outcome, the announcement of any numerical inflation objective should be made in the context of clear and effective communication of the Fed’s multiple goals.

Indeed, some economists take this position to an extreme, believing that uncertainty, both about the current and likely state of the economy and about the effects of monetary policy on the economy, is so overwhelming that policymakers should be humble and focus on only one thing: inflation—which is what the Fed can undeniably control in the long run. This approach is often referred to as “strict inflation targeting.” But I, for one, am not a strict inflation targeter... And—as far as policymakers go—I do not think I’m in the minority.

One important advantage of well-anchored inflation expectations is that it can give the central bank the freedom to react to other developments...without raising concerns about its commitment to price stability. Indeed, well anchored inflation expectations are likely to give the Fed greater freedom to accomplish the other part of its mandate: maximizing employment.

Of course, there are potential costs to [inflation targeting]...One is the possibility of miscommunication regarding our dual objectives...Some may misinterpret the enunciation of a long run inflation objective as a down-weighting of the Committee’s mandate to foster maximum employment...The announcement of any numerical inflation objective should be made in the context of clear and effective communication of the Fed’s multiple goals.

For the Fed to interpret the broad language of the Full Employment and Balanced Growth Act as an invitation to write rules instituting a strict form of inflation targeting would be an extreme stretch, though perhaps not for a soft form of inflation targeting.

There is widespread agreement among central bankers and monetary economists that although, over the long run, it is feasible for the central bank to control inflation, long-run growth and employment are predominantly determined by forces independent of monetary policy. So it makes little sense for the central bank to adopt a long-run objective for growth or employment.

The central bank is capable of achieving an inflation objective, at least on average over a period of years. In contrast, if we define full employment in terms of a threshold for the unemployment rate consistent with maximum sustainable employment, the central bank has no choice about what this threshold should be. It is determined by the structure of the economy, including the effectiveness of institutions and markets in matching vacancies and unemployed workers, and by policies, such as the levels of unemployment compensation and minimum wage rates.

So, to me, the argument for the Fed's dual mandate is both straightforward and convincing. The central bank exists to serve society. The public cares deeply about fluctuations in the pace of economic activity. And well-executed monetary policy has the power to mitigate fluctuations in employment. As the mathematicians say, "QED." Fortunately, almost all central bankers accept this argument nowadays, notwithstanding a great deal of misleading rhetoric to the contrary.