Ricardian Ambivalence: Fed doesn't really have dual mandate

A very good analysis from Australia's best inflation forecaster, who pinged Q4 as well:

Bernanke was careful to say that the Fed has a dual mandate – maximum employment and stable prices (which means 2% PCE inflation). However, the more Bernanke said (he answered a few such questions), the clearer it became that the Fed ‘model’ has only a short run trade-off. Thus, the main influence of the unemployment part of the dual mandate is that it shapes the glide path back to the 2% inflation target following a shock. Again, this reflects the mainstream of academic opinion – there is no long run trade-off, but monetary policy can have short run impacts on real variables.

The Fed’s Statement of objectives was not specifically designed to knock the NGDP-target school, but it’s worth teasing out the consequences of the FOMC view about the potential for such a policy given the popularity of the subject.

Compare this on inflation:

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation

with this on unemployment:

The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee’s policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision.

Translated: the Fed thinks it can hit an inflation target on average over time, but does not think it can reliably influence real variables. The problem with an NGDP target is that it puts an equal weight on something they control, can hit (on average over time), and can measure with something they do not control, cannot hit, and cannot measure. The point target for inflation and the range for the NAIRU reflect the relative ‘controllability’ of these two objectives.