What Is the Fed’s Third Mandate?

TradingKey - In the public eye, the Federal Reserve’s policy objectives have long centered on two core tasks — “price stability” and “maximum employment” — commonly known as its “dual mandate.”

However, in fact, the Federal Reserve Act grants the central bank a third, much less discussed mission: to foster moderate long-term interest rates.

For decades, this objective has been viewed not as an independent policy goal, but merely a complement to the other two.

At his press conference following the September rate decision, Chair Jerome Powell acknowledged that while the law does indeed outline a triple mandate, moderate long-term rates are naturally achieved as outcomes of low inflation and full employment, and thus do not require separate pursuit.

The Fed’s primary tool — the federal funds rate — directly influences short-term borrowing costs. But long-term rates are shaped by a far more complex mix of factors, including expectations for future inflation, economic growth, fiscal deficits, global capital flows, and market risk appetite. This means the Fed’s direct control over long-term rates is significantly weaker than over short-term rates.

Yet history shows the Fed does not remain passive when long-term rates threaten financial stability.

During the 2008 financial crisis and the 2020 pandemic, the Fed launched large-scale asset purchase programs (QE), buying Treasury bonds and mortgage-backed securities to raise bond prices and lower long-term yields. This reduced financing costs for businesses and households and helped stabilize markets during periods of extreme stress.

Nonetheless, such actions have sparked controversy. Critics argue that QE effectively monetizes government debt, enabling sustained high fiscal deficits. Especially after Donald Trump’s return to the White House, he has repeatedly urged the Fed to cut rates aggressively — citing the need to reduce federal interest payments — bringing renewed attention to the so-called “third mandate.”

As rate cuts proceed and new governors join the Board, debate may intensify over how the Fed defines its role in shaping long-term rates.

The key question for investors is whether the Fed will continue treating long-term rates as a byproduct of its dual mandate — or gradually assign it a more explicit and independent role in policy communication.

Powell’s message has already made one thing clear: the “third mandate” is best understood not as a standalone policy axis, but as an extension of the first two.