Essay on Feds Transition from Monetary to Interest Rate Targets

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Feds Transition from Monetary to Interest Rate Targets The Fed’s Transition from Monetary Targets to Interest Rate Targets


The 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 interest rates remained steady. In contrast, during 1994, the FOMC announced six different policy changes while at the same time making an adjustment to the short-term interest rate. This change in policy was due to two factors. First, the economic environment had changed. The Fed’s monetary policy during 1993 was accommodative to permit the recovery of the economy from a recession, while
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Multi-Stage Process

The emergence of price stability as the ultimate goal of the Fed’s monetary policy is not because there has been a decision to choose between conflicting goals, but rather, because achieving price stability facilitates the realization of the other goals of monetary policy over the long-term. Also, price stability appears to offer more value to society than any of the other goals. Not only can it facilitate the stability of some of the other goals, it is highly valued by businesses and individuals. An environment of stable prices makes financial planning much simpler, and thus people are much more willing to make investments in the economy if the future is not as uncertain as it could be. Although the Fed still needs to consider all six goals when making decisions regarding monetary policy, focusing on the primary goal of price stability permits a narrowing of focus and a more concerted effort determining monetary policy. To keep on track toward achieving the goal of price stability, there is a four-step process that is utilized. This process involves the use of the following: 1) policy tools, 2) operating targets, 3) intermediate targets and 4) monetary policy goals. The last step, the monetary policy goals, has already been discussed. To achieve its desired goals, the Fed uses its policy tools to make the appropriate adjustments to the

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