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The Federal Reserve’s Mandates

By David T. Zaring and Jeffery Y. Zhang. Full Text.

Solutions to systemic problems such as climate change and racial inequities have eluded policymakers for decades. In searching for creative solutions, some policymakers have recently thought about expanding the Federal Reserve’s core set of macro-economic mandates to tackle these issues. But there are real questions about whether that can be done from a legal perspective and whether that should be done from a policy perspective.

In this Article, we propose a framework to answer these two questions of “can we” and “should we”—a framework grounded in administrative law and macroeconomics. In Part I, we consider the legal challenges that the Federal Reserve would face if it tried to adopt new mandates by itself, without congressional blessing. These challenges include the major questions doctrine and procedural hurdles in administrative law. In Part II, we tackle the normative question by leveraging macroeconomic theory to understand whether new mandates can be successfully balanced against existing ones. Even if adopting a new mandate is legal, it might not be good policy—regardless of whether the Federal Reserve enacts the mandate itself or Congress does so.

We then apply our framework to newly proposed policy objectives for the Federal Reserve, including the proposed purchase of green bonds, the implementation of climate stress tests, and the closing of racial wealth gaps. To be clear, nothing in our framework implies that Congress should ignore longstanding social problems. Rather, our framework suggests that Congress should not have a regulatory agency—with its limited set of tools—expand beyond its original mandates and core competencies to solve those problems. Instead, Congress should empower the agencies most closely aligned with those objectives, thereby avoiding real administrative law constraints and minimizing difficult policy- making dilemmas where the agency faces competing responsibil- ities. Indeed, if an agency tries to juggle too many balls at the same time, it may drop them all.