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In pursuit of money

  • Economics


September 5, 1980 In Pursuit of Money Last October 6, the Federal Reserve made what was probably the greatest change in monetary pol icy si nce the Federal Reserve- Treasu ry Accord of 1951, when the Fed broke loose from the Treasury dominance which had characterized the World War II and early postwar years. On October 6, 1979, the Fed announced that it was changing the basic way in which it conducts open-market poli- cies-the buying and selling of Government securities-in the pursuit of it's monetary ob- jectives. The Fed described this basic change to Congress as follows: "Previously the reserve supply had been more passively determined by what was needed to maintain, in any given short-run period, a level of short-term interest rates, in particular a level of the Federal-funds rate, that was considered consistent with longer- term money growth targets. Thus, the new procedures entail greater freedom for interest rates to change over the short-run in response to market forces." Many economists had argued that under pre- vious operating procedures, monetary policy tended to amplify movements in real output (GNP), instead of moderating and stabilizing such cyclical swings as it should. To these critics, the policy shift (if successfully pur- sued) presaged a more stabilizing role for monetary policy. But the man in the street- and many financial analysts-remain dubi- ous about the outcome of this policy shift. The greater stability in money-supply growth (if achieved) may seem too great a price for the increased variability in interest rates since last October. For that reason, it might be use- ful to examine the intellectual background of monetary-control ru les and operating proce- dures. This means reviewing the previous criticism of the Fed's operating procedures, as well as the rules of thumb that economists have proposed for appropriate monetary policy. Critical legacy According to the earlier critics, the Federal Reserve, by "targeting" or att

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