Why everybody's talking about the Fed's "third mandate"
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Federal Reserve governor Stephen Miran at his confirmation hearing. Photo: Daniel Heuer/Bloomberg via Getty Images
It is rare for four words — in a confirmation hearing for a single Federal Reserve governor, for a term that expires in just a few months — to get the attention of bond markets.
- But these are not normal times.
Why it matters: Stephen Miran's testimony before the Senate Banking Committee two weeks ago hinted that he and other President Trump appointees will view the Fed's assignment differently than past officials.
Driving the news: Miran did not refer to the often-discussed "dual mandate" Congress has assigned the Fed, of stable prices and maximum employment.
- Instead, he said that "Congress wisely tasked the Fed with pursuing price stability, maximum employment, and moderate long-term interest rates" — adding the third, more rarely noted, mandate contained in the Federal Reserve Act.
- That emphasis could imply the Fed looking to directly affect long-term borrowing costs, in contrast to the traditional view that low long-term rates are the happy result of achieving the other goals, particularly low inflation.
State of play: The Fed directly controls short-term interest rates, while longer-term rates are set in bond markets. But that doesn't mean Fed decisions don't affect long-term borrowing costs — which in turn shape mortgage and corporate rates.
- The Fed's management of its $6.6 trillion balance sheet affects the supply of long-term securities on the open market.
- Its regulatory decisions can shape banks' desires to buy long-term bonds.
- Most important, at least from the traditional Fed view, is that if the central bank is credible in keeping inflation in check, long-term rates will stay low because investors are confident their returns will not be inflated away.
Flashback: Former Fed chair Ben Bernanke summed up how Fed officials traditionally think about this third mandate in a 2010 speech footnote:
- "The goal of moderate long-term interest rates is frequently dropped from statements of the Federal Reserve's mandate not because the goal is unimportant, but because moderate long-term interest rates are generally the byproduct of price stability."
Yes, but: If the Fed were to start taking the long-term rates mandate more seriously on its own, rather than as a downstream result of price stability, it could imply more activist behavior on the balance sheet and regulatory fronts.
What they're saying: "It's not hard to see where this could go in the future," wrote Michael Brown, senior research strategist at Pepperstone, in a note.
- If cuts to short-term interest rates don't translate into lower long-term rates, "given Miran's comments, and the Federal Reserve Act itself, there is a decent chance that Treasury Secretary [Scott] Bessent, or even President Trump, argue that the Fed aren't in fact fulfilling every part of the job that they've been asked to do," Brown wrote.
- In that scenario, they could opt to end the shrinkage of the Fed's balance sheet, resume buying longer-term securities through quantitative easing or, in a more extreme scenario, go "full BOJ," as Brown puts it, mimicking the Bank of Japan by doing "yield curve control" setting targets for long-term rates.
Reality check: Miran is one of seven governors. He was named to a term that expires in January (though he could stay on longer if a successor isn't confirmed).
- His testimony merely described the law accurately and didn't explicitly embrace more out-of-the-box approaches to keeping long rates low.
Zoom out: That said, there has been a consistent drumbeat of talk from the Trump appointees that getting long-term rates down is a key focus.
- It would thus be unsurprising for the president's Fed nominees to adopt the same line.
