They are often collectively referred to by saying that the Federal Reserve views inflation as being “mandateconsistent” if it is running at “2 percent or a bit under.” Congress has also mandated that the FOMC set monetary policy so as to promote maximum employment. Some see an intrinsic conflict between the FOMC’s price stability mandate and maximum employment mandate.
But there is actually a deep sense in which the price stability and maximum employment mandates are intertwined. Imagine that inflation runs at 3 or 4 percent per year for three or four years. The public will then start to doubt the credibility of the Fed’s stated commitment to a 2-percent-or-a-bit-under objective. The public’s medium-term inflationary expectations will consequently begin to rise.