Guides to Monetary Policy

Although the goals of monetary policy are clearly spelled out in law, the means to achieve those goals are not. Changes in the FOMC’s target federal funds rate take some time to affect the economy and prices, and it is often far from obvious whether a selected level of the federal funds rate will achieve those goals. For this reason, some have suggested that the Federal Reserve pay close attention to guides that are intermediate between its operational target (the federal funds rate) and the economy.

Among those frequently mentioned are monetary aggregates, the level and structure of interest rates, the so called Taylor rule and foreign exchange rates. Some suggest that one of these guides be selected as an intermediate target,that is, that a specific formal objective be set for the intermediate target and pursued aggressively with the policy instruments. Others suggest that these guides be used more as indictors, to be monitored regularly. In other words, the Federal Reserve could establish a reference path for the intermediate variable that it thought to be consistent with achieving the final goals of monetary policy, and actual outcomes departing appreciably from that path would be seen as suggesting that the economy might be drifting off course and that a policy adjustment might be necessary.

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