Prior to 1977, the U.S. Federal Reserve had only one main job: maintaining price stability.
In a 1996 speech before the Economic Club of New York, William McDonough, president of the Federal Reserve Bank of New York at the time, was quoted as saying, “Price stability is both important and desirable because a rising price level–inflation–even at moderate rates, imposes substantial economic costs on society. All countries incur these costs.”
However, stagflation of the 1970s inspired politicians to assign the Fed another task: promoting maximum employment. At the height of the economic crisis in 2009, in light of its dual mandate, the Fed took extraordinary measures, later to become popularly known as QE1 and QE2, with the intention of spurring economic growth that would ideally lead to higher employment. However, while the Fed’s recent policy actions have had a significant impact on the S&P 500 over the last two years, it has begun to generate considerable inflation while having done little to create meaningful job growth. (more…)