Federal Reserve's "forgotten credit mandate"

[James Keenan]

At the New York Deficit Owls meeting last night, I had occasion to mention this recent article in the Harvard Law Review, "The Federal Reserve’s Forgotten Credit Mandate". While it's not an "MMT article" per se, it has been cited in a number of things I've been reading in the past two weeks. So people interested in Fed policymaking may find it interesting. (I haven't fully read it myself yet.)

[Jay Mills]

Thanks Jim,

I read a good chunk of it and then got a summary as follows:

Basic Takeaways:

• Misread Mandate: The Fed's "dual mandate" (stable prices, maximum employment) is a misinterpretation of Section 2A of the Federal Reserve Act. The author claims the true, forgotten mandate is primarily to regulate credit aggregates commensurate with economic potential, not to control all forms of inflation.
• Historical Practice: Historically (1913-1977), the Fed saw itself as a credit regulator, using tools like selective credit controls and repeatedly denying sole responsibility for overall price levels, acknowledging other factors like supply shocks.
• Volcker's Shift: Former Fed Chair Paul Volcker's aggressive interest rate hikes in the 1970s marked an unauthorized shift from this credit-based mandate to broadly fighting all inflation, causing high unemployment and discrediting credit regulation.
• Modern Relevance: This misinterpretation continues today. The Fed should address excessive credit even without general inflation, but should not raise rates if inflation is due to non-credit factors (e.g., supply chain issues as in 2021-2022). The article highlights the economic costs and potential overreach of the Fed's current broad approach.

Relation to Modern Monetary Theory (MMT):

The article's arguments resonate with several tenets of MMT, particularly regarding:

• Fiscal vs. Monetary Policy: The article asserts that if inflation isn't credit-driven, Congress or the President should use other tools like stopping monopolistic behavior, deploying strategic commodity reserves, or even wage and price controls. This aligns with MMT's emphasis on fiscal policy (government spending and taxation) as the primary tool for managing aggregate demand and inflation, especially for non-monetary causes, rather than relying solely on central bank interest rate adjustments.
• Understanding Money and Credit: MMT emphasizes that sovereign governments, as currency issuers, create money through spending. The article's focus on "dollars added to the economy that was not taxed back out" (from the associated image) and the Fed's role in regulating "credit aggregates" delves into the operational mechanics of money and credit creation, which is a core MMT focus. The idea that debt isn't solely a "burden" but a record of government spending (dollars added to the economy) not yet taxed back out, is a fundamental MMT perspective.
• Limits of Monetary Policy: The author critiques the Fed's "blunt tool" of interest rates and warns against assigning monetary policy a larger role than it can perform. This mirrors MMT's view that monetary policy, especially interest rate manipulation, is less effective at directly controlling inflation or achieving full employment than is often assumed, particularly when supply-side constraints are at play.
• Administrative Overreach: The concern that the Fed might interpret its mandate too broadly to tackle issues like climate change or inequality also aligns with MMT's call for democratically elected fiscal authorities (Congress) to set policy goals, rather than unelected central bankers.

Best,

Jason

On May 21, 2025, at 8:45 AM, James Keenan <jke...@pobox.com> wrote:

At the New York Deficit Owls meeting last night, I had occasion to mention this recent article in the Harvard Law Review, "The Federal Reserve’s Forgotten Credit Mandate". While it's not an "MMT article" per se, it has been cited in a number of things I've been reading in the past two weeks. So people interested in Fed policymaking may find it interesting. (I haven't fully read it myself yet.)

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[Warren Mosler]

Good stuff, thanks!

As Bernanke once said, 'I take my marching orders from Congress.'

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[Brian Flaherty]

Thanks for sharing Jim. Interesting and thought-provoking paper. I just read through and I have to say I remain unconvinced. 

Here is my understanding of Dinovelli's argument:

1. The Fed is only authorized to adjust credit conditions to pursue its goals...
2. Therefore the Fed is only authorized to pursue its goals when credit conditions are causing the problem. 

This is quite the logical leap, and I don't think Dinovelli supports it very well. For instance, if a doctor is only allowed to use medication to treat high blood pressure, it doesn't mean that they can only prescribe it when medication is causing the high blood pressure.

Dinovelli's strongest point seems to be that historically Fed officials held the view that they should only focus on credit-fueled inflation. That may be true, but it's not uncommon for agency missions to evolve over time. 

By no means am I arguing that the Fed is the best actor capable of controlling e.g. energy shock inflation, or that attempts to do so won't have unpleasant distributive effects. But neither do I think doing so is outside their legal mandate. 

Thoughts?

Brian

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