Both Democratic and Republican Members of Congress have introduced legislation that would replace the current multigoal mandate of "maximum employment, stable prices, and moderate long-term interest rates" with a single goal to maintain "stable prices." Central bankers in all countries share a number of concerns. This notion of a political business cycle enjoys some support among economists. The Case Against a Single Goal for Federal Reserve Policy

It is, perhaps, best to begin the case against a single goal for the Federal Reserve with the proposition that while the current monetary system does not have an explicit anchor such as would be provided by a fixed exchange rate or a legislated inflation target, it does have an implicit anchor. Thus, in practice, the adoption of an inflation target cannot be supported on the grounds that the Fed has neglected to pursue the goal of price stability. Nevertheless, the case for using an intermediate target and what is required to make it work is well stated by Bernanke and Mishkin:
If credibility building is an important objective of the central bank, and if there exists an intermediate target variable—such as a monetary aggregate—that is well controlled by the central bank, observed and understood by the public and the financial markets, and strongly and reliably related to the ultimate goal variable, then targeting the intermediate variable may be the preferred strategy. Our central bank was to serve as a "lender of last resort" to the financial system in time of trouble to avert a serious destabilization or even collapse (such a role is currently being played by the Federal Reserve as it deals with the financial crisis that began in the summer of 2007). Most governments have fiscal policies, debt management policies, and even exchange rate policies. The Case Against a Single Goal Fed Policy—Summary

Critics of proposals to make price stability the sole goal of monetary policy argue that there are other important goals that monetary policy can and should accomplish. These critics believe that the economy is too complex for monetary policy to be committed to one simple goal. It is impossible to foresee every contingency, so discretion is necessary to allow experts to use their best judgment. Technical Problems With Implementing a Price Stability Goal40

Beginning in the late 1980s, a number of countries imposed a goal of price stability on their central banks. Although the utility of this definition for policy formulation can be challenged, it does raise the question of whether price stability should be defined in general terms or in terms of a quantified numerical target. If too many events that cause prices to change are made exceptions to a price stability goal, confidence could be undermined and the directive to the central bank would be significantly diluted. Most countries have chosen not to make a list of formal exceptions. How Long Would the Central Bank Have to Achieve Its Goal? Thus, success in meeting a goal of price stability would likely depend on the time horizon over which the goal would need to be met. Conclusion

The American model of central banking has distinctive attributes. While proponents are likely to agree that monetary policy has been a success in the last two and a half decades, they would attribute that success to the Fed's decision to focus single-mindedly on price stability. Alternatively, if the price stability goal is interpreted as a regime of "constrained discretion" which still allows for the stabilization of output, then critics would view the current multi-goal mandate as more appropriate. For that reason, the Fed could not reasonably be expected to keep inflation on a point target at all times, should a price stability goal be adopted. Fed Chairman Ben Bernanke, a longtime advocate of inflation targeting, has argued that the Fed could independently adopt one without any change to the current mandate.
Some economists have long criticized the American model of central banking for featuring multiple policy goals, discretion on the part of the central bankers as to which goal to emphasize, freedom in the choice of instruments to achieve the policy goals, and rather vague accountability for policy failures if, indeed, these can even be identified. Recently, the critics have urged that the multiple policy goals of the Federal Reserve (Fed) be replaced by a single goal of price stability. Critics believe that central bankers tend to use their discretionary powers to achieve political as well as economic objectives, notably to create "good times" through monetary expansion. Since these "good times" do not last long, such a policy imparts a costly inflationary bias to an economy and, hence, is not economically optimal over time. Among other virtues, it is argued that a single goal would provide an explicit anchor for the American monetary system.
The current model has strong support as well. Since an economy faces many unforeseen contingencies, supporters argue that giving central bankers multiple goals and a high degree of discretion is optimal. They question whether a price stability goal would be flexible enough to allow the Fed to remain the lender of last resort to the U.S. financial system and to cope with short run stabilization problems that beset the country at times such as the financial turmoil that began in the summer of 2007. They note that the Fed has successfully delivered price stability for over two decades under the current multi-goal regime. Both proponents and opponents of a price stability goal are supported by an array of economic theories and empirical studies.
To formally replace the current multi-goal mandate of "maximum employment, stable prices, and moderate long-term interest rates" with a single goal of price stability would require legislation. Members from both parties have introduced such legislation in past Congresses. But Fed Chairman Ben Bernanke, a long-time advocate of inflation targeting, has argued that the Fed could independently adopt an inflation target without changing the multi-goal mandate. A number of countries have made price stability the sole goal of their monetary policy. In practice, these countries have not focused their monetary policy solely on price stability, but have responded to changes in output and to the recent turmoil in financial markets. Thus far, these policy shifts seem not to have undermine their long-term price stability goals. This arrangement has been coined "constrained discretion."
The price stability goal, while simple and straightforward, raises a number of technical questions about definition, in terms of a goal of inflation or constant prices, whether a point or band target should be used, and the appropriate price index to measure price stability. The goal may also place constraints on fiscal, debt management, and exchange rate policies—policies not delegated to the Fed. Accountability should be greater than under the current regime, but the degree of accountability depends on how the goal is defined. Since it is infeasible to expect the central bank to keep inflation right on target at all times, consideration should be given to the exceptions granted to the goal and the permissible time interval over which the targets must be met. But these exceptions in turn make accountability more difficult. This report will be updated as events warrant.