America’s central bank is operating with instructions written when an Apple II was cutting-edge technology and a pocket calculator cost more than a television.
While the world has been transformed by globalization, artificial intelligence, and supply chain warfare, the Federal Reserve remains shackled to a 1977 dual mandate designed for a simpler economic era.
President Donald Trump is right to demand lower interest rates. His administration has successfully tamed inflation with May CPI data showing a manageable 2.4% increase over the year prior. Even the president’s most vociferous critics have been forced to acknowledge the economic reality that tariffs have not impacted inflation.
Yet, in his congressional testimony this week, Federal Reserve Chair Jerome Powell remained noncommittal on when he would support lowering rates. Whenever Powell acts, it’s already too late.
The solution isn’t replacing Powell, or another rate cut. It’s fundamentally reconsidering the Federal Reserve’s approach to setting interest rates by adding trade balance as the Fed's third mandate.
When Congress established the Fed’s dual mandate of price stability and maximum employment, the U.S. trade deficit was a manageable $27 billion. Today, it exceeds $900 billion, a 3,200% increase in nearly a half-century. The numbers are even more staggering when looking strictly at goods. Last year, the U.S. reached a record $1.2 trillion trade deficit in goods, compared with a $31 billion goods trade deficit in 1977.
The Federal Reserve ignores this data — and its long-term economic impacts — when setting rates under its existing dual mandate. The Fed’s focus is strictly on the latest inflation data or jobs report — without seeing the bigger picture.
Over the long-term, the American worker has watched the slow, painful death of our manufacturing base. In June 1979, U.S. manufacturing jobs peaked at 19.55 million, or 19% of the total labor force. As America’s population has increased, we’ve lost 6.8 million real jobs. Manufacturing now represents just 7.5% of our total labor force.
Price stability and low unemployment, while essential, fall short of ensuring long-term economic resilience. Persistent trade deficits hollow out industries critical for national security. The pandemic exposed the profound dangers of import dependence when supply chains collapsed. America imports 75% of our essential medicines and remains heavily dependent on semiconductors and pharmaceuticals, a strategic vulnerability that no great power can afford.
The Fed's restrictive policy creates a vicious cycle. High rates discourage domestic investment needed to rebuild supply chains and compete with China. Simultaneously, the strong dollar makes imports cheaper and exports costlier, widening trade deficits that hollow out the very industries we need for our long-term security. Our trade deficit with China alone reached $419 billion in 2024.
A trade balance mandate would break this cycle by giving the Fed explicit authority to consider how monetary policy affects America's global competitiveness. Rather than fighting thepPresident on tariff policy, the Federal Reserve would have a tool to strengthen Trump’s hand in global trade negotiations. By aligning interest rates with trade objectives, the Fed could complement tariffs and subsidies, acting swiftly to rebalance global trade.
Arguably, a more accommodating Federal Reserve chair would already see the connection between trade deficits and employment. University of California, Berkeley economist Enrico Moretti, who has conducted extensive research on the multiplier effect of industries, estimated that every additional job in manufacturing creates 1.6 jobs for its home city.
Congress modernized the Fed's mandate in 1977 to address that era's realities: stagflation and high unemployment. Today's challenge is different but equally urgent. We must maintain American economic leadership in a multipolar world where trade is a weapon of statecraft and control of supply chains determines national power.
Critics may argue that a triple mandate complicates the Fed’s mission or invites politicization. On the contrary, a trade balance mandate could identify specific objective standards for trade balances, such as trade deficits as a percentage of GDP, to give the Fed the flexibility to address these structural challenges.
The dual mandate served America well when trade was a smaller part of the economy, but it is now obsolete. A third mandate focused on trade balance would equip the Fed with the tools needed to secure America’s economic future, ensuring monetary policy supports, rather than subverts, our national interest.
Michelle Steel represented California in Congress from 2021 to 2025 and served as a member of the House Ways and Means Committee.
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