For decades, the Fed has been anchored by two guiding principles: full employment and price stability, otherwise referred to as its “dual mandate.”

For most of modern history, it’s been sacrosanct. The Fed isn’t meant to juice the economy or help politicians manage deficits. Its job is to keep inflation under control while supporting a healthy labor market.

However, another idea has crept back into the conversation. Trump-appointed Fed nominee Stephen Miran, during a Senate testimony, invoked a long-forgotten clause in the original 1913 Federal Reserve Act: the goal of maintaining “moderate long-term interest rates.”

The Fed’s “third mandate” has historically been dormant, referenced only in moments of extreme national stress like World War II or the 2008 financial crisis.

Today’s environment hardly qualifies as a crisis. By invoking the third mandate, Fed officials and the Treasury are risking losing sight of proper monetary policy.

The market still prices the Fed as independent for now. But if this “third mandate” becomes more than talk, that could change fast.

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For decades, central bankers have anchored their credibility to two guiding principles: full employment and price stability.

That’s the so-called “dual mandate” of the U.S. Federal Reserve. And for most of modern history, it’s been sacrosanct. The Fed isn’t meant to juice the economy or help politicians manage deficits. Its job is to keep inflation under control while supporting a healthy labor market.

But lately, another idea has crept back into the conversation. During recent Senate testimony, Trump-appointed Fed nominee Stephen Miran invoked a long-forgotten clause in the original 1913 Federal Reserve Act: the goal of maintaining “moderate long-term interest rates.”

Soon after, Treasury Secretary Scott Bessent echoed the same clause in a Wall Street Journal op-ed.

For bond traders, this is a potential warning sign.

The Fed’s “third mandate” isn’t new, but its reemergence is no accident.

As Bloomberg reports, the clause, which was buried in the original Fed charter, has historically been dormant, referenced only in moments of extreme national stress like World War II or the 2008 financial crisis. Even then, it was viewed as a result of trying to manage one of the largest wars and financial crises on record.

Today’s environment hardly qualifies as a crisis. Inflation is slightly above target, but it’s not spiraling. The labor market is likewise cooling, but it’s doing so at a manageable rate. There’s no macroeconomic rationale for reviving this clause.

There is, however, a political one.

The U.S. is staring down $37.4 trillion in national debt, with annual deficits running north of 6% of GDP. That creates a simple incentive: lower long-term interest rates would ease the pain of debt service and make room for more spending.

By invoking the third mandate, Fed officials and the Treasury are risking losing sight of proper monetary policy.

Analysts are now gaming out scenarios where the Fed buys long-dated Treasurys again… Some warn of new yield curve control tools or coordinated policy between the Treasury and Fed. This could be a soft return to quantitative easing under a different name.

When the central bank starts serving fiscal priorities, it can’t be trusted to prioritize inflation control. Investors stop believing the Fed will do “what it takes,” and inflation expectations become unanchored.

And that’s exactly the danger of politicized monetary policy.

The risks are already visible. Despite a cooling labor market, 10-year yields remain elevated. This is partly because investors suspect more spending is coming, and partly because they don’t believe the Fed will push back hard enough.

More alarming, long-term bond buyers are starting to demand inflation protection. Some are buying shorter-term Treasury Inflation-Protected Securities (“TIPS”). These rise if inflation rises. Others are simply exiting the Treasury market altogether.

Investors need to stay alert. A Fed pivot toward managing long-term yields won’t be announced in a press release, as it will show up gradually in the behavior of longer-dated bonds.

If 10- or 30-year yields stay put despite rising inflation data, it would mean the Fed is coordinating with the Treasury to manage the curve, and that would be a reason for investors to lose trust in the Fed’s inflation-fighting credibility.

The market still prices the Fed as independent for now. But if this “third mandate” becomes more than talk, that could change fast.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research