Federal Reserve Operating Procedures: A Survey and Evaluation of the Historical Record Since October 1979

Abstract

William Poole has produced another thoughtful and thought-provoking paper. Two major conclusions emerge from his work. First, instability of growth in M1B since October 1979 can be attributed largely to a reluctance by Federal Reserve to permit wide enough swings in federal funds rate. Second, to correct this problem and to promote greater stability in financial markets and economy, Fed ought to replace lagged with contemporaneous reserve accounting and reform discount window. They should then begin to hit a nonborrowed base or reserves target that grows at a steady rate. I will organize my comments around these two conclusions. I will not comment directly on other excellent paper in this session by Ralph C. Bryant. I will refer to some of Bryant's empirical work, though, in my discussion of Poole paper. Poole attributes continued extensive volatility of M1B growth since October 1979 to efforts by Federal Reserve to smooth interest rates. He concedes that the Fed really has let go federal funds rate to a very considerable extent. But he believes that variability (in M1B growth) over tonger periods . . . is due primarily to important role accorded interest rates in Federal Reserve policy making (italics mine). He cites four reasons for believing that post-October 1979 targeting procedures qualitatively are not very different from federal funds targeting procedure followed earlier. Of four, most interesting (and empirically verifiable) is that in nearly one-third of weeks since October 1979 federal funds rate has averaged within 100 basis points of either bottom or top of widened target range. During these weeks constraint on funds rate might have prevented Fed from hitting its nonborrowed reserves target. Poole, in fact, accepts this view uncritically.