Fed Should Drop Dual Mandate, Focus on Inflation: Corker

Sen. Bob Corker (R-Tenn.) wants the Federal Reserve to drop its dual mandate of ensuring price stability and full employment and focus only on containing inflation.

Corker, a member of the banking committee who rose to prominence during the legislative battle over financial reform, told CNBC that the "dual mandate creates a lot of confusion."

U.S. Senator Bob Corker (R-TN)
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U.S. Senator Bob Corker (R-TN)

"We need to bring clarity to our monetary policy," he said, adding that the current mandate is "bipolar."

Corker voted for Chairman Ben Bernanke's renomination a year ago, even though other GOP members opposed it, and was generally supportive of the Fed's early efforts to prop up the economy at the height of the financial crisis.

His proposal to scale down the Fed's dual mandate—unusual for a central bank—comes amid growing concern about the Fed's latest move to use unusual monetary-policy tools to stimulate the economy. Most central banks are charged only with managing inflation through price stability.

The central bank's so-called QE-2 effort—which seeks to lower market interest rates through Treasury purchases in the hope of stimulating lending—has provoked a firestorm of criticism at home and abroad.

Corker, who met with Bernanke Monday. declined to say that the Fed had gone too far. "I don't think anybody knows the answer to that."

Critics say the plan to buy up to $600 billion in government debt—following a similar but larger program focused on private sector mortgage-backed securities a year ago—is unlikely to improve growth while almost certain to spark inflation in the years ahead.

A number of foreign governments—including major trading partners—say the Fed's plan is also intended to decrease the value of the dollar to help US exports. Such a policy would essentially make the goods and services of other countries less competitive.

New York Fed President Bill Dudley, in one of the first Fed interviews since the central bank's policy came under attack at the G20 meetings in Seoul, told CNBC said critics were "off base" to believe the aim of the policy is to weaken the U.S. dollar.

Dudley, in a CNBC interview, directly responded to comments from the German Finance Minister ahead of the G20 meeting last week that the U.S. central bank was working to "artificially lower the value of the dollar."

"I think that's very off base because I think that the goal of our policy is a very simple one, to ease financial conditions," Dudley said. The Fed is "not trying to push the dollar to any particular level."

Dudley conceded that the Fed could have done a better job communicating the reasons for its decision to purchase $600 billion in Treasurysand went on to address some of the most-widespread criticisms of Fed policy.

Dudley also disagreed with predictions that the extra stimulus would lead to inflation, saying the Fed has the tools to quickly withdraw excess cash from the banking system when a solid economic rebound is evident.