The Federal Reserve's 'dual mandate' is a widely recognized concept, but a lesser-known third objective is crucial to its function: maintaining moderate long-term interest rates. This 'third mandate' was brought to the forefront in 2025 when Stephen Miran, a newly appointed Fed governor, highlighted its importance in his Senate testimony. While Miran is correct that Congress has tasked the U.S. central bank with all three objectives, the story doesn't end there. The Fed's goals have evolved over time, often in response to crises. The original Federal Reserve Act of 1913 focused on flexibility in currency supply and banking system supervision, not employment or price stability. The Employment Act of 1946 introduced the concept of promoting maximum employment, production, and purchasing power, with the latter implying low inflation. The Federal Reserve Reform Act of 1977 formalized the dual mandate, emphasizing stable prices and moderate long-term interest rates alongside maximum employment. However, the Fed's primary tool for achieving these goals is the short-term Federal Funds rate, not directly controlling longer-term rates set by financial markets. Studies show that the Fed's policy decisions influence long-term rates through 'expectations theory', where markets anticipate future short-term rates. This means that long-term rates are inherently linked to the Fed's dual mandate, reflecting the economy's current and future stability. While the Fed rarely directly influences long-term rates, it has taken actions like quantitative easing to lower borrowing costs and support the economy, always with the dual mandate in mind. The Fed's commitment to economic stability is paramount, ensuring that long-term interest rates are appropriate for the nation's well-being.
