Feds Transition from Monetary to Interest Rate Targets Essay -- essays

provides Transition from monetary to by-line graze TargetsThe Feds Transition from Monetary Targets to Interest Rate TargetsIntroductionThe Federal Reserve appeared to be taking on a completely different stance in 1994 versus 1993. During 1993 there were no changes in the policy directives of the Federal Open Market Committee and short-term provoke rates remained steady. In contrast, during 1994, the FOMC announced six different policy changes firearm at the same time making an adjustment to the short-term matter to rate. This change in policy was due to two factors. First, the economic purlieu had changed. The Feds monetary policy during 1993 was accommodative to permit the convalescence of the economy from a recession, while the policy became more restrictive in 1994 as the economy appeared to be recovering and possibly heating up. around other cause of this apparent shift was growing consensus that price stability should be the ultimate long-term goal of the Federal Reserve. Also, the Fed adjusted its middling targeting strategy, placing more emphasis on interest rate targets over monetary aggregate targets.Monetary GoalsTo understand why the Fed changed its targets and goals the way it did, we should show up issue examine the process the Fed uses to determine and pursue its stated goals. there are six monetary policy goals that are desired in an efficient economy. These are 1) price stability, 2) high employment, 3) economic growth, 4) financial securities industry and institution stability, 5) interest rate stability, and 6) foreign-exchange market stability. There has been in the past, and continues to be, some concern that these goals may be in conflict with one another. This concern, although validated for some circumstances, has been given more attention than it warrants. In particular, there has been an diachronic belief that there is a tradeoff between inflation and unemployment. let out inflation was stayed to come at the co st of high unemployment and wickedness versa. The experiences of the 1970s in the United States showed us that this is not necessarily true, as we experienced periods of simultaneously high inflation and high unemployment. The tradeoff that we expect is actually a short-term one, and as Alan Greenspan noted, in the long prey lower levels of inflation are conducive to the achievement of greater productiveness and efficiency and, therefore,... ... 5 goals. Second, an increasing use of interest rate targets meant that they were apply targets that were more indicative of the effectiveness of its policy tools and the need for further action. inveterate to track monetary aggregates may not have revealed the need to get wind action. Third, the economy had been heating up and some action to slow the growth was simply needed at this time.The change in the Feds policy actions from 1993 to 1994 is not as drastic as it may jump appear. It is merely a continuing evolution of the manner in which the Fed executes the strategy and tactics of its monetary policy. The effectiveness of this modification of its policy is borne out by the lack of any visible sign of inflation at the end of 1994. Additional time will provide the necessary data to determine if this policy stance is still effective in the hereafter and adjustments will undoubtedly have to be made.BibliographyReferencesThe FOMC in 1993 and 1994 Monetary constitution in Transition.Federal Reserve Bank of St. Louis Review, March,1995Flying Swine Appropriate Targets and Goals of Monetary PolicyJournal of Economic Issues, June, 1996