ABSTRACT
The Federal Reserve System was founded by act of Congress in 1913, with the primary directive to “furnish an elastic currency”. Its mission was expanded in the aftermath of the Great Depression to include responsibility for operating monetary policy in a manner to help stabilize the economy. After World War II, Congress directed the Fed to pursue a dual mandate, long interpreted to mean full employment and reasonable price stability. The Fed was left to decide how to implement policy to achieve these objectives, and has over time experimented with a variety of methods, including interest rate, reserve, and money aggregate targets. While some central banks have adopted explicit inflation targets, the Fed has argued that this would limit its ability to respond in a flexible manner to disruptions, and would not be consistent with its dual mandate. Note also that none of the later amendments to the 1913 act have supplanted the Fed’s original directive to act as lender of last resort or manager of the national payments system, and thus provide an “elastic currency”. Finally, the Fed has always been in charge of regulating and supervising member banks – a responsibility it shares with the Treasury.
