How the Fed Got Itself Boxed In - The Big Picture
By Barry Ritholtz - August 10th, 2011, 7:20AM
www.ritholtz.com
The Federal Reserve (unlike most other central banks) has a dual mandate: Maintain full employment and keep inflation at bay. History informs us that these two factors are often opposed to each other: Growth begets price rises, and excessive price elevation retards growth. Hence, for the Fed to do its job well, they have a neat balancing trick to perform. We can trace the origin of the current Fed situation to a drift away from those two mandates. This occurred sometime in the 1990s, when then Federal Open Market Committee (FOMC) chair Alan Greenspan somehow began focusing on markets, asset pricing and a nonsensical catchall investor confidence.
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Barry Ritholtz, who wrote the excellent book Bailout Nation, gives us a short, clear, succinct explanation of what happened after Alan Greenspan's Federal Reserve decided that supporting risky asset prices to instill investor confidence became part of the Fed's mandate in the mid-1990s.
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