One System, Two Mandates: The Fed and Orderly Markets in Government Debt

Abstract

The U.S. monetary authority, the Federal Reserve, has always had two mandates. The first, and best known, is now codified at Section 2A: to maintain the long run growth of monetary and credit aggregates. But the second, codified at Section 15, is also important—to serve as the fiscal agent of the United States. For most of its history, the leadership of both the Fed and the U.S. Treasury have understood this latter responsibility to entail a distinct charge to ensure orderly markets in U.S. government debt. That has occasionally led to dramatic action, most recently during the Covid pandemic of 2020 but also many times throughout the twentieth century. 

This Article offers the first assessment of this orderly markets mandate. It locates the origins of the concept in nineteenth century agricultural economics, and it traces the Fed’s concern with orderly markets from crops to government debt. It identifies Section 15 of the Federal Reserve Act as the legal basis for what became an explicit and public commitment by Fed officials to ensuring orderly Treasury markets in 1951. It further reveals how, at that time, “market functioning purchases” were quite common. And it shows how Fed officials developed an elaborate institutional framework to avoid these purchases and solve what we call the “one system, two mandates” problem. That framework—which we recover and reconstruct—was so successful at limiting conflict between monetary policy and Treasury refinancing that the Fed’s role in facilitating orderly Treasury markets slipped from view. But, as we further explain, this framework broke down after the Global Financial Crisis of 2008 and, in 2020, the Fed was forced to engage in massive purchases to restore market functioning. Now the Fed faces confusion about its role in financial markets and a conflict between its responsibilities not seen in generations. We conclude with suggestions for ways the Fed could change how it promotes orderly markets to better carry out both its mandates.